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MASTERARBEIT
Titel der Masterarbeit
Past and Future Development
of the Airline Industry
in South- and North East Asia
Verfasserin ODER Verfasser
Christian Nau, BA
angestrebter akademischer Grad
Master of Arts (MA)
Wien, Mai 2014
Studienkennzahl lt. Studienblatt: A 066 864
Studienrichtung lt. Studienblatt: Masterstudium Wirtschaft und Gesellschaft Ostasiens
Betreuerin ODER Betreuer: Prof. Dr. Rüdiger Frank
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1 Introduction to the Past and Future Development of the Airline Industry
in South- and North East Asia ......................................................................... 7
2 Measuring Development of the Airline Industry ...................................... 10
2.1 State of the Art and Existing Literature ............................................................. 10
2.2 The Region “Asia-Pacific” and Focusing on Certain Countries .................... 11
2.3 Defining Past and Future Development............................................................. 12
2.4 Methodology: Analysing and Comparing the Airline Industry Development
Divided by Airports, Airlines and Manufacturers ........................................................ 13
2.4.1 Sourcing ............................................................................................................... 13
2.4.2 Dividing the Aviation Industry into Categories .......................................................... 14
2.4.3 Airports in East Asia .............................................................................................. 15
2.4.4 North- and South-East-Asian Airlines ...................................................................... 16
2.4.4.1 Choice of Airlines ........................................................................................... 16
2.4.4.2 Financial Data Development Analysis .............................................................. 17
2.4.4.2.1 Choosing Financial Criteria for Analysis ...................................................... 17
2.4.4.2.2 Passenger Revenue, Total Revenue and Expenses..................................... 18
2.4.4.2.3 Operating Profit and Operating Ratio .......................................................... 18
2.4.4.3 Operational Data Development Analysis .......................................................... 18
2.4.4.3.1 Choosing Operational Criteria for Analysis .................................................. 18
1.1.1.1.1 Available Seat Miles, Revenue Passenger Miles and Load Factor ................ 19
2.4.4.3.2 Passenger Numbers .................................................................................. 19
2.4.4.3.3 Aircraft Utilization Rate............................................................................... 20
2.4.4.4 Key Indicators in Regard to Airline Development .............................................. 20
2.4.4.4.1 Combining Operational and Financial Data.................................................. 20
2.4.4.4.2 CASM: Cost per Available Seat Mile ........................................................... 20
2.4.4.4.3 Yield: Revenue per Passenger Mile ............................................................ 21
2.4.4.4.4 Calculation of a Profitability Index ............................................................... 21
2.4.4.4.5 Calculation of an Efficiency Index ............................................................... 21
2.4.4.5 Displaying, Analysing and Comparing Results.................................................. 22
2.4.5 Aircraft Manufacturers and the Asia Pacific Market .................................................. 22
2.5 Growth in the Airline Industry............................................................................. 23
2.5.1 Defining Growth Factors ........................................................................................ 23
2.5.2 Overall Economic Growth and its Interdependence with the Airline Industry .............. 23
2.5.3 The Impact of Crisis’ to the Airline Industry.............................................................. 24
2.5.4 Population Growth, Urbanization and the Emergence of a Middle-Class.................... 25
2.5.5 The Impact of Falling Prices as a Result of Competition in the Market ....................... 26
2.5.6 Alternative Forms of Transportation ........................................................................ 27
2.5.7 Government Regulations ....................................................................................... 28
2.5.8 Tourism as Growth Factor for the Airline Industry .................................................... 30
2.5.9 Other Airline Industry Growth Factors ..................................................................... 32
3 Past Development of the Airline Industry ................................................ 32
3.1 Introduction to Asia-Pacific Airline Industry .................................................... 32
3.1.1 Development of the Airline Industry until 2000 ......................................................... 32
3.1.2 Defining and distinguishing Full Service Airlines and Low Cost Carriers .................... 34
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3.2 Airline Industry Development in North-East-Asia ............................................ 37
3.2.1 Past Development of Low Cost Carrier Airlines in North East Asia ............................ 37
3.2.2 Case Study 1: China.............................................................................................. 39
3.2.2.1 Introduction to the Development of Aviation in the P.R.C. ................................. 39
3.2.2.2 Development of Airline Industry Growth Factors in China .................................. 39
3.2.2.2.1 Economic Growth Development in the P.R.C............................................... 39
3.2.2.2.2 Population Development and Urban Population in China .............................. 40
3.2.2.2.3 Development of Competition ...................................................................... 40
3.2.2.2.4 Development of Alternative Transportation in China ..................................... 40
3.2.2.2.5 Development of Chinese Government Regulations ...................................... 41
3.2.2.2.6 Tourism Development in the P.R.C ............................................................. 44
3.2.2.3 Airports in China ............................................................................................ 45
3.2.2.4 Airlines in China ............................................................................................. 47
3.2.2.4.1 Introduction to Airlines in China .................................................................. 47
3.2.2.4.2 Air China................................................................................................... 47
3.2.2.4.2.1 Introduction to Air China ...................................................................... 47
3.2.2.4.2.2 Statistical Data for Air China................................................................. 48
3.2.2.4.2.3 Financial Development Analysis ........................................................... 49
3.2.2.4.2.4 Operational Development Analysis ....................................................... 49
3.2.2.4.2.5 Analysis of Key Indicators of Airline Development.................................. 50
3.2.2.4.3 China Southern ......................................................................................... 50
3.2.2.4.3.1 Introduction to China Southern ............................................................. 50
3.2.2.4.3.2 Statistic Data for China Southern.......................................................... 51
3.2.2.4.3.3 Financial Development Analysis ........................................................... 52
3.2.2.4.3.4 Operational Development Analysis ....................................................... 52
3.2.2.4.3.5 Analysis of Key Indicators of Airline Development.................................. 52
3.2.2.4.4 China Eastern ........................................................................................... 53
3.2.2.4.4.1 Introduction to China Eastern ............................................................... 53
3.2.2.4.4.2 Statistic Data for China Eastern ............................................................ 54
3.2.2.4.4.3 Financial Development Analysis ........................................................... 55
3.2.2.4.4.4 Operational Development Analysis ....................................................... 55
3.2.2.4.4.5 Analysis of Key Indicators of Airline Development.................................. 55
3.2.2.4.5 Findings in Regard to Chinese Airlines ........................................................ 56
3.2.2.5 Aircraft Manufacturers and China .................................................................... 57
3.2.3 Case Study 2: Japan ............................................................................................. 58
3.2.3.1 Introduction to Japan as one of the World’s Strongest Economies ..................... 58
3.2.3.2 Development of Airline Industry Growth Factors in Japan ................................. 58
3.2.3.2.1 Economic Growth Development in Japan .................................................... 58
3.2.3.2.2 Population Development and Urban Population in Japan ............................. 59
3.2.3.2.3 Development of Competition in the Japanese Airline Industry ....................... 60
3.2.3.2.4 Development of Alternative Transportation in Japan .................................... 60
3.2.3.2.5 Development of Government Regulations in Japan ...................................... 60
3.2.3.2.6 Development of Tourism in Japan............................................................... 62
3.2.3.3 Japanese Airports .......................................................................................... 62
3.2.3.4 Airlines in Japan............................................................................................. 64
3.2.3.4.1 Introduction to Japan’s Airlines ................................................................... 64
3.2.3.4.2 Japan Airlines ........................................................................................... 64
3.2.3.4.2.1 Introduction to Japan Airlines ............................................................... 64
3.2.3.4.2.2 Statistical Data for Japan Airlines ......................................................... 64
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3.2.3.4.2.3 Financial Development Analysis ........................................................... 66
3.2.3.4.2.4 Operational Development Analysis ....................................................... 66
3.2.3.4.2.5 Analysis of Key Indicators of Airline Development.................................. 67
3.2.3.4.3 All Nippon Airways..................................................................................... 68
3.2.3.4.3.1 Introduction to All Nippon Airways ........................................................ 68
3.2.3.4.3.2 Statistical Data for All Nippon Airways .................................................. 69
3.2.3.4.3.3 Financial Development Analysis ........................................................... 70
3.2.3.4.3.4 Operational Development Analysis ....................................................... 70
3.2.3.4.3.5 Analysis of Key Indicators of Airline Development.................................. 71
3.2.3.4.4 Findings in Regard to Japanese Airlines...................................................... 72
3.2.3.5 Aircraft Manufacturers in Japan ....................................................................... 73
3.3 South-East-Asian Airline Industry Development.............................................. 73
3.3.1 Introduction to the Development of South East Asia................................................. 73
3.3.2 Development of Growth Factors Affecting the ASEAN Region .................................. 74
3.3.2.1 Government Regulatory Policies on the Regional Level: Open Sky in ASEAN .... 74
3.3.2.2 The Asian Financial Crisis and its Influences onto the South East Asian Aviation
Industry 76
3.3.3 Low Cost Carrier Emergence and Development in South-East Asia .......................... 77
3.3.4 Case Study 3: Singapore ....................................................................................... 78
3.3.4.1 Introduction to Singapore’s Development ......................................................... 78
3.3.4.2 Development of Airline Industry Growth Factors in Singapore ........................... 79
3.3.4.2.1 Introduction to the Development of Growth Factors in Singapore .................. 79
3.3.4.2.2 Economic Development of Singapore ......................................................... 79
3.3.4.2.3 Population Development and Urban Population in Singapore ....................... 80
3.3.4.2.4 Development of Competition within Singapore’s Airline Industry ................... 80
3.3.4.2.5 Development of Alternative Transportation in Singapore .............................. 81
3.3.4.2.6 Development of Government Regulations ................................................... 81
3.3.4.2.7 Development of Tourism in Singapore ........................................................ 82
3.3.4.3 Airlines in Singapore ...................................................................................... 83
3.3.4.3.1 Singapore Airlines ..................................................................................... 83
3.3.4.3.1.1 Introduction to Singapore Airlines ......................................................... 83
3.3.4.3.1.2 Statistical Data for Singapore Airlines ................................................... 83
3.3.4.3.1.3 Financial Development Analysis ........................................................... 85
3.3.4.3.1.4 Operational Development Analysis ....................................................... 85
3.3.4.3.1.5 Analysis of Key Indicators of Airline Development.................................. 85
3.3.4.3.2 Findings in Regard to Singaporean Airlines ................................................. 86
3.3.4.3.3 Low Cost Carriers in Singapore .................................................................. 86
3.3.4.4 Aircraft Manufacturers and Singapore.............................................................. 87
3.3.4.5 Airport Development in Singapore ................................................................... 87
3.3.5 Case Study 4: Malaysia ......................................................................................... 88
3.3.5.1 Introduction to Malaysia’s Development ........................................................... 88
3.3.5.2 Development of Airline Growth Factors in Malaysia .......................................... 88
3.3.5.2.1 Economic Growth Development in Malaysia ................................................ 88
3.3.5.2.2 Population Development and Urban Population in Malaysia ......................... 88
3.3.5.2.3 Development of Competition ...................................................................... 89
3.3.5.2.4 Development of Alternative Transportation in Malaysia ................................ 89
3.3.5.2.5 Development of Malaysian Government Regulations ................................... 90
1.1.1.1.2 Tourism Development in Malaysia .............................................................. 90
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3.3.5.3 Airlines in Malaysia ........................................................................................ 91
3.3.5.3.1 Air Asia Group ........................................................................................... 91
3.3.5.3.1.1 Introduction to Air Asia and its Development ......................................... 91
3.3.5.3.1.2 Statistical Data for Air Asia ................................................................... 92
3.3.5.3.1.3 Financial Development Analysis ........................................................... 93
3.3.5.3.1.4 Operational Development Analysis ....................................................... 94
3.3.5.3.1.5 Analysis of Key Indicators of Airline Development.................................. 94
3.3.5.3.2 Malaysia Airlines ....................................................................................... 95
3.3.5.3.2.1 Introduction to Malaysia Airlines ........................................................... 95
3.3.5.3.2.2 Statistic Data for Malaysia Airlines ........................................................ 95
3.3.5.3.2.3 Financial Development Analysis ........................................................... 96
3.3.5.3.2.4 Operational Development Analysis ....................................................... 96
3.3.5.3.2.5 Analysis of Key Indicators of Airline Development.................................. 97
3.3.5.3.3 Findings in Regard to Airlines of Malaysia ................................................... 98
3.3.5.3.4 Other Malaysian Airlines ............................................................................ 98
3.3.5.4 Airports in Malaysia ........................................................................................ 99
3.3.5.5 Aircraft Manufacturers in Malaysia................................................................. 101
3.3.6 Findings regarding the Development of the Airline Industry in South- and North East
Asia in the Past .............................................................................................................. 102
4 Future Development of the Aviation Industry in North- and South-East-
Asia ............................................................................................................. 105
5 Conclusion ............................................................................................ 108
6 References ............................................................................................ 110
7 Abbreviations ........................................................................................ 117
8 List of Tables and Figures..................................................................... 118
9 Appendix 1: World Bank data................................................................ 119
.................................................................................................................... 120
10 Appendix 2: Abstract ......................................................................... 121
11 Appendix 3: Kurzzusammenfassung.................................................. 122
12 Appendix 4: Curriculum Vitae (English) ............................................. 124
13 Appendix 5: Curriculum Vitae (Deutsch) ............................................ 125
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1 Introduction to the Past and Future Development of the Airline
Industry in South- and North East Asia
The airline industry is a unique and extremely fascinating industry. “It captures the
interest of a wide audience because of its glamour, reach and impact on the large
and growing numbers of consumers worldwide”. Sir Colin Marshall, former Chairman
of British Airways, named the airline industry “the flywheel for the engine of the
world's industry”. (Chan 2000)
The airline industry is also an industry that is changing very quickly. Hardly a
day goes by without notable changes in the global aviation industry. In the year 2012
alone there were several airline insolvencies within the worldwide aviation market,
including those of Hungary’s national carrier “Malév Hungarian Airlines” and the
Spanish “Spanair”. More positive airline-related news were the first deliveries of new
and enhanced aircraft models from Boeing, the “747 Intercontinental” and the “787
Dreamliner”, as well as various new airline companies that were established, such
as Air Asia Japan and Scoot.
The airline industry, the world’s largest industry and at the heart of travel and
tourism, impresses with stunning figures: 20 years ago – quite a long time in this
business and even though the industry was still much smaller than today – it already
employed one in nine workers worldwide. (Corporate Location Journal 1994)
Aviation is at the heart of global economic development, and global economic
growth will shape future aviation. After Europe and North America, Asia-Pacific is
currently the third major region in the field of global aviation. (Chan 2000)
This will change in the future with Asia-Pacific region becoming the world
premier region in the field of aviation.
Especially in North- and South East Asia, air transportation is extremely
important as it does not only serve to stimulate the economic development, e.g. trade
and growth in the tourism industry, but also helps to improve the people’s mobility.
More generally speaking, the air transportation and therefore the airline industry
helps to weave together a modern society. (Zhang, et al. 2008)
Talking of the airline industries‘ global commercial influence, observers have
suggested that “Europe is the past, the US the present and Asia the future”. This is
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„a sweeping assessment, but there are grains of truth, as Europe’s economy looks
firmly rooted in debt for at least several years; the US, still a massive aviation market,
appears to be forging a shaky recovery, albeit heavily founded on debt and with a
political melange more appropriate to a fairground. Asia meanwhile is robust and
gearing up for a bigger future, even faced with a slack global economy“. (Centre for
Aviation 2014)
World aviation has experienced elementary changes within the last decades.
One of the most fundamental activators has been and still is the emergence of new
growth poles in North- and South East Asia that globalization has brought. Along
with worldwide liberalization and deregulation of the international air transportation
markets this had led to the establishment of plenty of new airlines. A further dynamic
development of the international air transport can be expected in the next years and
decades. Growth markets will continue shifting further from the United States and
Europe to North- and South East Asia where the demand of flights, given an ever-
expanding middle-class, will be growing perceptible. (Ruerup and Reichart 2014)
The continuously growing importance of the “Asia-Pacific region” as it is
defined by the International Civil Aviation Organization, covering more than 16,000
kilometres from West-Afghanistan to East-Tahiti and more than 11,000 kilometres
from Mongolia in the North to the southern tip of New Zealand, can be explained by
three key factors: The defining characteristic of the Asia-Pacific region is its
geographic fragmentation and its vastness, which emphasizes one of the aviation
advantages: saving time. Additionally, there is often no effective alternative ground
transportation, whether by road, rail or sea for long distance traveling. The second
main reason is demand for transport – the demographic factor: The Asia-Pacific
region has an enormously large population. Even if, because of income differences,
the propensity to fly is still much lower than in western societies, economic
development over the past decades has created wealthy middle classes who fly for
business and leisure. This economic development can be seen as the third and main
reason for the growth and quick development of the Asia-Pacific aviation industry.
(B. Graham 1995)
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Although the title of this thesis is “Past and Future Development of the Airline
Industry in North- and South-East Asia”, there is also some content that is related to
the whole of the Asia-Pacific region because many numbers and statistics are not
available for South- and North-East-Asia dedicatedly. However, the main focus of
the paper will still lie on the airline industry of selected countries in South- and North-
East-Asia. Especially for the category of developing countries, for example China
and Malaysia, integration into the international airline industry is an important
prerequisite to access global flows of money, goods, people, and information.
This is the reason why this term paper will handle China in greater detail and
scope than “already developed” countries Singapore and Japan. The airline sector
is a highly competitive industry. Airlines are subject to multiple sources of competitive
pressure; for example competition between airlines, the threat of market entry and
bargaining power of key suppliers can be named. Unit costs have been driven down
by continuous deregulation and technological improvement. Especially the
linearization in the field of airline industry has led to a growing and effective
competition amongst the participants, the airlines. The entry of so called Low-Cost-
Carriers has ensured consumers benefitting from lower fares. “In many ways, the
airline industry could be seen as a ‘poster-child’ for the consumer benefits of
competition”. (Wittshire 2013)
The paper will show that this assumption can be regarded as true already
today. In terms of research questions, this paper does not only want to show that
there can be found clear correlations between the growth of economies of South-
North East Asian countries and the growth of their airline industries but also which
countries of South- and North East Asia sport the most pronounced growth in the
aviation sector within the last two decades and what factors can be seen as the
reasons for this growth. Furthermore this thesis aims to identify which airlines were
best able to cope with and profit from the changes in the North- and South-East
Asian aviation sector, and what the key reasons for their success are. The thesis will
also answer the question why the penetration of South- and North East Asian
countries by Low-Cost Carriers still very uneven and how has the Low-Cost aviation
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sector in North- and South-East Asia developed within the last years. All answers to
these questions will be given in the general findings section.
Following this general introduction, a brief conclusion of existing literature will
be given together with an explanation of the distinctiveness and main characteristics
of this thesis. The methodology part will not only clearly define the geographic area
of research and time span but also examine how the paper will structure, display and
measure its main information used for comparison and answering questions. It will
provide information about how growth factors in the airline industry can be defined
as well as according to what numbers and key elements a comparison can be carried
out properly. Other definitions will be given at the point of necessity rather than
defining them beforehand. Following the methodology part, the first main chapter of
the thesis will be made up by case studies of the past development of airlines in
various selected countries and the different development of the aviation sector in
North –and South-East-Asia. The future development of the airline industry in East
Asia will then make up the smaller second main part. All findings will then later be
compared and explained in regard to the main questions of this paper. Finally,
findings will be summarized in a brief conclusion.
2 Measuring Development of the Airline Industry
2.1 State of the Art and Existing Literature
Throughout the process of researching literature regarding the past and future
development in North- and South-East Asia, a vast quantity of various scientific
sources in the broad field of the airline industry has been found. Many of them have
a very specific focus on a certain topic within this field and are often limited to a
single country. Though this literature is highly interesting and topics are diverse,
most of these journal articles and books are not in the field that this thesis is
concentrating on, providing an overview about the general developments within the
last two decades in North- and South-East-Asia, set in a context with growth factors
in the airline industry. Research related to the field of airline industry is still a field
where the majority of researchers comes from the United States and a lot of research
11
is related to single U.S. airlines or the North American airline industry when focusing
at a specific geographic area. As already mentioned, there is a lot of journal articles
and books dealing with both the development of the airline industry as well as the
future of this industry. As the airline industry as a field that consists of daily changes
is an area where you cannot rely on papers and books that have been written years
or even months’ ago. The likeliness that they, especially when dealing with current
or future developments, are already outdated – partly or even as a hole – is high.
Having a look at the development of low-cost airlines in South-East-Asia for example,
this is an area that has brought massive changes in the last couple of years.
Concluding this literature review, one finds that there cannot be found literature or a
methodology that is perfectly suitable to carry out the analysis for the development
of the airline industry in North- and South East Asia in the light of the last two
decades and to give an outlook for the next 20 years. Therefore the next chapter
gives a detailed view about the methodology that has been built in on two different
pillars in order to carry out this task and is not existing in current literature so far.
2.2 The Region “Asia-Pacific” and Focusing on Certain Countries
The International Civil Aviation Organization as well as other important institutions
like the International Air Transport Association and statistics related to the airline
industry normally look at Asia-Pacific as a single region. It is an enormously big
sprawling region consisting of diverse nations. Therefore, the question arises what
to include in this thesis and according to which criteria countries should be selected.
As the title of this thesis is “Development of the airline industry in North- and South-
East Asia”, the aim is to select both a relatively equal number of countries in the two
geographical areas for comparison, as well as comparing the North-East-Asia and
South-East-Asia with each other as there can be found remarkably differences, for
example in regard to the Low Cost Carrier development and their current penetration
rates. For the North-East-Asian region, the People’s Republic of China (hereinafter
referred to as China) and Japan have been chosen, mainly because of their different
developmental stages including political, demographic and economic factors such
as political systems, economy growth rates and population structure. These are also
12
the important characteristics according to which the neighbouring countries
Singapore and Malaysia have been chosen for the area of South-East-Asia, both of
them members of the Association of South-East Asian Nations that currently consists
of ten member countries. In the following thesis, the terms South-East-Asia and
ASEAN will be used equally as per the definition of the thesis South-East-Asia is
made up of the ten ASEAN countries. Anyhow, caused on the one hand by its
continuous growing importance on a global level and on the other hand as certain
statistics are only available for the complete Asia-Pacific region, the thesis will also
look at the development of the Asia-Pacific airline industry as a whole besides
providing a view of the world aviation development. This gives the chance to
compare the Asia-Pacific region to other regions in the world, for example the so
called mature air markets North America and Europe as well as the worldwide-
aviation industry. This paper clearly focusses on the civil airline industry with
passenger airlines in focus. Airlines that carry freight cargo only will not be
mentioned, although the paper provides some information about the development of
cargo freight.
2.3 Defining Past and Future Development
The thesis aims to provide a look into the past and future. This brings the necessity
for defining a clear time-span that is used. As the airline industry, as already
mentioned in the introduction, is an industry that is changing quickly, it does not
make sense to look back as far as 50 years while there is no possibility for a realistic
outlook into this industry’s development over such a long time span. Forecasts in the
airline industry usually comprise the period of the next twenty years. Therefore, it
makes sense to take this period of time when looking into the future as well as
highlighting the development of the last twenty years. Looking at the last twenty
years though is only possible for some important traditional airlines, so-called Full-
Service-Airlines, in North- and South-East-Asia whereas most Low-Cost-Carriers
have developed only in the last couple of years. Detailed characteristics of both
airline types will be given later in this paper. In terms of extent, the clear focus of the
13
thesis lies on the analysis of the past development of the airline industry which will
make up the most part of the thesis as it can be built on statistics and findings that
are reliable whereas the future part is always – even though the outlook is built on
reliable forecasts and aircraft order numbers – bearing a risk of unforeseeable
external influence factors.
2.4 Methodology: Analysing and Comparing the Airline Industry
Development Divided by Airports, Airlines and Manufacturers
2.4.1 Sourcing
There are various institutions and data providers that supply the airline industry with
statistics, forecasts and comprehensive reports on specific airlines, airports and
markets. Unfortunately, access to this data is very much restricted in the way that it
is only available for purchase and none of the contacted institutions agreed to
provide me with access for academic research purposes. The CAPA Centre for
Aviation for example offers only selected articles for free, access to their content,
especially databases, is beginning from 3,300 USD 1 ; the Airports Council
International offers their Global Traffic Forecast beginning from 2,310 USD2 as well
as OAG company provides comprehensive databases that are not accessible freely.
All big databases containing extensive information and statistics on the development
of the airline industry are not accessible when not belonging to a certain institution
or paying for it. Therefore, alternative sources had to be found and data had to be
compiled. Finding comparable numbers for the airlines that are in focus of this thesis
is one of the main achievements of this paper and will be displayed in the annex.
Comprehensive data for most airlines in focus could be sourced for the past two
decades (in this case defined as 1993 until 2012, as 2012 is the most recent year
with data available) with some minor exceptions where it was impossible to find
published data and airlines did not respond to or denied requests. Data was mainly
extracted from annual reports of the airlines as far as they were available. Freely
1 http://centreforaviation.com/about-capa/membership/ and access/price offer via email
2 http://www.aci.aero/Publications/Full-Publications-Listing/ACI-Global-Traffic-Forecast-20122031
14
accessible publications by ICAO and The International Air Transport Association
(IATA), the trade association for the world’s airlines were also used, mainly in regard
to data for the Asia-Pacific area and for data that was not airline specific.
Demographic and economic data regarding the development of North- and South-
East Asian countries has been extracted from the World Bank database, ASEAN
and OECD yearly reports.
Another issue with sources is that most statistics are available only on a yearly
basis instead of monthly data. Some airline companies, however, decided to begin
and end their fiscal year different from the calendar years which creates the problem
of comparability. In these cases, yearly fiscal data is available for slightly other time-
spans than the operational data which is available for calendar years for every airline
that is reviewed in detail. As the alternative – not being able to compare fiscal data
for some airlines – is worse than the minimal occurring inaccuracy when comparing
a fiscal year, for example ending March 1999 with the operational data for the
calendar year 1998, this inexactness of three months overlapping is accepted as it
does not lead to wrong results and conclusions. The impacts of large crises such as
the Asian Financial Crisis or the World Financial Crisis were felt over more than one
single year for example. Data in regard to growth factors in case studies that is
referred to where no specific source is mentioned always refers to the statistic tables
of the World Bank that can be found in the annex of this thesis.
2.4.2 Dividing the Aviation Industry into Categories
Although airlines, airports and aircraft-manufacturers are, of course, not the only
participants in the broad field of airline industry participants, they can be seen as the
most important ones and therefore are chosen for further research. In order to be
able to measure the development of the airline industry in certain countries, one has
to find comparable categories and numbers for these nations.
Therefore, the paper will have a look at the countries’ air-carriers as well as
at the airports. There will of course be differences between the number of people
that have been handled by all the airports of a particular country and all passengers
15
that have flown with the airlines of this country. The reason for that is simply
globalization: Airlines from all over the world bring passengers to airports in Asia but
these airlines won’t appear in any airline statistics on Asian airlines. By comparing
data of both local airlines and airports in the findings-section there is also the chance
to find out whether a growth in total passengers in a certain country also has
benefited local carriers, or if foreign carriers have mainly been responsible for the
growth. Regarding aircraft manufacturers, this paper will have a look at how the
global market players, Airbus and Boeing, performed and whether airlines in North-
and South-East-Asia seem to have a strong preference in terms of their aircraft
suppliers.
The main focus of this work lies in the comparison of important passenger
airlines in the regions of research. Their financial as well as operational development
will be shown, compared and set in context with growth factors of the airline industry
that have been developed before. This comparison, carried out in the findings
section of this thesis, will take place on various levels. First, airlines will be compared
with their competitors (if available) on a local level, e.g. comparing Air China to China
Eastern and China Southern. Secondly, the airlines will be compared on a regional
level. Lastly, this thesis will explore how they performed on the global stage.
2.4.3 Airports in East Asia
Airports in general are among the most important infrastructure elements of modern
cities. They play a crucial role in the globalization of production, for example by
mobilizing (senior) staff of major companies and institutions. Consequently, airports
play a critical role in the evolution or transformation of economies into knowledge
based economies as face-to-face contact of key actors is very important. In our
economies “the vitality of a location is tied to its global accessibility, strengthening
the role of the airports in economic development. Increasingly, too, airports are
involved in the movement of freight as more goods are able to utilize air freight to
reach markets. The tourist industry also relies upon air traffic for its growth; in many
16
places the traffic at the airport reflects the vitality of the tourist industry. For these
reasons, airports are critical to the vitality of metropolitan areas”. (O'Connor 1995)
The paper will provide information on some of the most important airports in
China and Japan as well as Singapore and Malaysia. Their development will be
described briefly if there is particularly interesting information. The development of
the countries’ most important airport passenger numbers and cargo freight numbers
(if available) will be compiled, with a focus on the time from the year 1993 till today.
As sometimes there are no numbers available for that exact period of time in this
regard, the best data available close to these years will be used instead. This is done
to gain numbers that later give the chance to compare the growth of different airports
in the different countries with each other. To think laterally, the finding section will
also put these numbers in an Asia-Pacific and worldwide context, for example by
comparing it with the world’s important airports.
2.4.4 North- and South-East-Asian Airlines
2.4.4.1 Choice of Airlines
Looking and analysing airline development in both geographical regions can be seen
as one main focus of this thesis and will make up a huge share of the main part.
Important airlines of all countries in focus will be divided by their country of origin
and, after roughly outlining their characteristics like e.g. their historic development,
categorized whether they can be seen as a classic Full Service Carrier or as a Low
Cost Carrier. Airlines in focus have been chosen according to their size, selecting
the biggest ones - in terms of passenger numbers – and omitting those too small or
only operating domestically or regionally. This is done in order to be able to compare
airlines each other as it would not make any sense to compare a worldwide-
operating airline with hundreds of planes and thousands of employees with an airline
operating domestic services with a single plane only.
The main goal of research has been to find comparable statistics for the most
important Airlines of South- and North-East Asia that show their development in the
past 20 years, both financial development as well as operation statistics. Here, a
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problem occurs regarding Low Cost Carriers: Firstly, comprehensive statistics are
only available for Full Service Carriers as Low Cost Carriers in South and North East
Asia normally do not publish their detailed operating data. Secondly, this thesis
wants to analyse the development in the light of the past two decades – there is not
a single LCC in one of the regions that has existed this long. Therefore, a solution is
to focus on Full Service Airlines but to include one big Low Cost Airline that has
existed for at least one decade. The Air Asia Group has been chosen for this purpose
as it has been operating in all South East Asian countries in focus of this thesis since
2004. In the airline section – by contrast to the airport development - there will not
be any information on carried freight-cargo. This is because of various reasons:
Reliable numbers in this regard are rarely available and hardly comparable as there
are some airlines that carry some cargo, some that carry nearly nothing besides
passengers and some that make their only business with cargo transport. Therefore,
a comparison would barely make sense and lead to wrong results. To be able to
measure how successful airlines have developed within the last 20 years, criteria
had to be found according to which one can define their success and compare it with
that of competing airlines and countries. Two categories, each including various
criteria, have been chosen and will be reviewed on a yearly basis:
2.4.4.2 Financial Data Development Analysis
2.4.4.2.1 Choosing Financial Criteria for Analysis
In terms of financial data, statistics include passenger revenue numbers as well as
Total Revenue numbers and numbers for expenses. There will be a look at the
airlines’ operating profit and expenses which gives the chance to calculate and
compare the yearly operating ratio. The net income after taxes – although included
in the statistics – is not reviewed as it includes too many exceptional numbers like
taxation and special items that often have nothing in common with the actual airline
operations.
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2.4.4.2.2 Passenger Revenue, Total Revenue and Expenses
Passenger Revenue is earned by the airline through the carriage of passengers in
their scheduled operations whereas revenues that are created from airline
operations including scheduled and non-scheduled service are called Total Revenue.
This means that the Total Revenue numbers do not only include revenue from
passengers but also other transport-related revenues such as cargo and excess
baggage. The development of the revenue numbers as well as expense numbers
themselves will not be analysed but will be used for calculating of other factors:
2.4.4.2.3 Operating Profit and Operating Ratio
The development of the operating profit as well as the operating profit margin for the
airlines in focus will be analysed for the last two decades. The operating profit margin
is a percentage number that describes earnings before such non-operating factors
as interest on debt, currency gains or losses and income taxes. However, the airline
industry uses the inverse of that number and calls it the operating ratio. That means
that a 5% operating profit margin becomes a 95% operating ratio in terms of the
airline industry. (Greenslet 2014)
2.4.4.3 Operational Data Development Analysis
2.4.4.3.1 Choosing Operational Criteria for Analysis
Operational data show not only the total passenger numbers for each year but also
Available Seat Miles (ASM), Revenue Passenger Miles (RPM) and the average
passenger load factor of the companies’ planes and total passenger numbers for
each year. Operational information regarding average flight stages (the distance
travelled by an aircraft from take-off to landing), fleet size and average number of
seats of the fleet is also shown in statistics but will only partly be used for the analysis
as these are no criteria that can be analysed themselves in a useful way but are
helpful or even necessary in combination with other criteria. Utilization time, however,
is very useful to this study and will be analysed as it indicates efficiency.
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1.1.1.1.1 Available Seat Miles, Revenue Passenger Miles and Load Factor
Available Seat Miles (ASM) are the most common measure of airline seating. It is a
capacity or supply definition and means one seat transported one mile, whether or
not it is occupied by a passenger. Revenue Passenger Mile (RPM) on the other hand
is the way traffic is measured in the airline industry and is reflecting one passenger
carried one mile. Traffic in the airline industry is used as a synonym for RPMs. The
percentage of RPMs to ASMs is called Load Factor and is a key measurement of
how efficiently the airline is utilizing its capacity. The development of the Load Factor
therefore will be analysed. Generally, a load factor as high as possible is desirable
as resources are used better the nearer this number comes to 100%. (Greenslet
2014)
One exception can be named: Greenslet explains that “in general higher is
better but there is a limit beyond which the airline will turn away, or “spill”, passengers
to its competitors and not have seats available for last minute business travellers
who are prepared to pay the highest fares for that seat. Since the real objective is to
maximize revenue not seat occupancy, the optimum load factor becomes the highest
that can be obtained while spilling as few passengers as possible. Once an airplane
leaves the airport gate, of course, empty seats represent inventory lost forever so
the art of inventory management is one of balancing the perishable nature of the
seat against the desire to have last minute product available for the premium buyer”.
(Greenslet 2014)
2.4.4.3.2 Passenger Numbers
The development of the airlines’ passenger numbers will – analogous to those of the
airports - be shown with a focus on the period from 1994 up to the latest data that is
available, usually 2012 or 2013.
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2.4.4.3.3 Aircraft Utilization Rate
Utilization rate in the airline industry refers to the number of hours per day that an
airplane operates. Together with the Load Factor, this makes up the two most
important numbers that can be manipulated by an airline to carry more passengers
while maintaining its fleet size. Both are, therefore, key measures of the capacity
utilization of the fleet and therefore of the airline efficiency in general. (Greenslet
2014)
2.4.4.4 Key Indicators in Regard to Airline Development
2.4.4.4.1 Combining Operational and Financial Data
By combining both financial and operational data that has been displayed before one
can calculate four different key data numbers that allow a comparison with
competing airlines, airlines of neighbouring countries in South- and North East Asia
as well as the worldwide airline industry.
2.4.4.4.2 CASM: Cost per Available Seat Mile
The so called Cost in Cent per Available Seat Mile (CASM), is the amount it costs
an airline to fly one seat one mile. CASM is the primary measure unit of cost in the
airline industry. It can be assumed that the lower the Cost per Available Seat Mile is,
the more efficient the airline is operating and therefore the more likely the airline will
be profitable. Therefore, CASM can be seen as a unit of measurement used to
compare the efficiency of various airlines. This number is calculated per available
seat mile instead of using passenger miles for calculation. This is because airline
costs are basically the same regardless whether a passenger is travelling on a seat
or not. CASM is expressed in cents to operate each seat mile offered, and is
determined by dividing operating costs by ASMs. The CASM is calculated on an
average basis for every airline, there is no diversification whether flights are national,
regional or long-haul which creates the problem of comparability: CASM can only be
compared amongst different airlines with highly different route-profiles with care. For
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example, all other factors being equal, an airline with a longer average stage length
like Singapore Airlines will usually have a lower CASM, because the airlines’ fixed
costs will account for a lower portion of its total costs. For this reason, CASM
comparisons across different airlines generally require, at a minimum, that CASMs
for all airlines be adjusted to a common stage length, or that the CASMs be graphed
versus the stage length of all the airlines being compared. Generally though it can
be said, the lower the CASM, the more likely profitable and efficient the airline. A
lower CASM means that it is easier for the airline to make a profit, as they have to
charge less to break even. A low CASM, however, is by no means a guarantee of
profitability. (Greenslet 2014)
2.4.4.4.3 Yield: Revenue per Passenger Mile
Yield means the amount of passenger revenue received for each RPM and is
displayed in US-Cents. It is a weighted average price paid by all passengers and
therefore does not represent the price paid by anybody. (Greenslet 2014)
2.4.4.4.4 Calculation of a Profitability Index
Prof. Jack Callon, University of California, proposes to define airline profitability as
[yield per RPM x load factor] – cost per ASM; arguing these are the three main
variables that airlines try to manipulate in order to survive and make profit. (Callon
2004)
This calculation method will be used for estimating a profitability index as it
can be regarded a good method for figuring out the profitability of an airline.
2.4.4.4.5 Calculation of an Efficiency Index
Utilization Rate and Load Factor, as already mentioned, are two important numbers
regarding the use of available capacity. By multiplying both variables one arrives at
an Efficiency Index as this is the comparison of what is actually “produced” with what
22
can theoretically be achieved with the same consumption of resources. The
maximum number of this index could theoretically be 24 (100% load factor x 24.00
hours of utilization rate). In fact, this is impossible, not only as no plane is able to fly
24 hours non-stop but also as refuelling, maintaining, cleaning, on- and offloading,
et cetera all need time. Generally long-haul planes will more easily reach high
utilization rates than short-haul planes. Therefore attention has to be paid when
comparing airlines with each other that have a completely different route profile or
fleet. The average number of seats per aircraft is a good indicator for the
classification of route profiles.
2.4.4.5 Displaying, Analysing and Comparing Results
Statistics do not only show e.g. whether airlines in focus of this thesis could increase
their operating profit and operating ratio but also provide the cost at which airlines
were able to produce available seat miles and yield as well as an efficiency and a
profitability index. By contrasting the growth or decline of these and some other of
the above defined numbers and indexes to the development of airline industry
growth factors that will be defined in the next chapter, this will for example indicate
whether the airline was able to benefit from the development of airline industry
growth factors.
2.4.5 Aircraft Manufacturers and the Asia Pacific Market
The commercial aircraft manufacturing industry composes one of the very few
genuinely global markets. The only market is international as no national or regional
market has the size to sustain a profitable airplane manufacturer industry. By
contrast, production is still national (Boeing) or regional (Airbus) with some
insignificant exceptions. (Sandholtz and Love 2001)
The world’s two biggest and most important aircraft manufacturers, Boeing
and Airbus, both regularly publish their “Orders and Deliveries Reports”. These will
be used to show how many planes have been delivered to some East Asian airlines
23
and – this is of special interest regarding future developments – how many have
already been ordered and will be delivered in the near future. Other aircraft
manufacturers like Embraer of course also deliver to South- and North-East Asia but
will not be included in this paper as their share is relatively small. Both, China and
Japan today have companies developing and building commercial aircraft but these
are – up until today – not important and it remains questionable whether these
projects will be successful on a worldwide long-term basis.
2.5 Growth in the Airline Industry
2.5.1 Defining Growth Factors
Singapore Airline’s then Chief Executive Officer, Dr Cheng Choon Kong said that
“for no rational reason, the aviation industry is not game to be like other industry”.
(Going Global 1997)
Key factors in the growth of air transportation include economic factors as well
as factors linked to demographics and socio-economic development. Urbanization
and wealth are two of them, as well as engineering progress. It is unquestionable
that an overall stable politic and economic environment supports growth in the airline
industry. The terror attacks of September 11 in the United States, the outbreak of
epidemics and various financial crises as well as unstable political situations have
enormously negative impacts on the performance and development of the airline
industry. Various growth factors that are important will be presented in the following
and later on the case studies of the particular countries will refer to most of these.
2.5.2 Overall Economic Growth and its Interdependence with the
Airline Industry
GDP continues to be a strong explanatory variable for aviation growth. (Airbus 2013)
It can be seen as one of the most important growth indicators and explanation
factors regarding the development or growth of the airline industry.
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Gross Domestic Products and the airline industry are deeply interwoven with
each other: The airline industry contributes to the GDP both directly and indirectly.
On the direct level, there are a lot of companies or even trade branches that rely
heavily on the airline industry, e.g. the logistic sector that transports time-critical
goods and can be seen as one of the industry's prime customers. Indirectly, the
airline industry creates jobs and economic activity along its supply chain amongst
other industry and service sectors. (Oxford Economics 2009)
Existing literature has often examined that an increase of GDP normally goes
hand in hand with airline industry growth. Therefore, case studies of the countries
will show the development of the nation’s GDP’s growth as this gives the chance to
set the growth of GDP in context with the growth of airlines and airports later. The
development of GDP per Capita will be also shown on a purchasing power parity
(PPP) basis as the PPP method “involves the use of standardized international dollar
price weights, which are applied to the quantities of final goods and services
produced in a given economy. The data derived from the PPP method probably
provide the best available starting point for comparisons of economic strength and
well-being between countries”. (CIA World Factbook 2014)
2.5.3 The Impact of Crisis’ to the Airline Industry
As the airline industry is a field that is influenced by daily life very much, crises have
a large impact on the industry. Their impact is usually direct and instant when people
cannot or do not want to fly – the industry has no chance to plan ahead and has to
react quickly. Depending on the intensity of crises and their duration, the impact can
take place on a short- or even long-term basis. As crises have normally taken place
regionally or globally, they will be explained and mentioned in general and later
referred onto rather than explaining every crisis in the case studies of the single
countries. In general, there is no doubt that crises of every kind negatively affect the
development of the airline industry.
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2.5.4 Population Growth, Urbanization and the Emergence of a Middle-
Class
It is obvious that an increase of a population can be seen as an increase in potential
airline customers and therefore likely has a positive influence on demand. Anyhow,
particular attention should be paid to the emergence and/or the rise of the so called
middle class. For centuries, the middle class has always played a special role in
economic thought as the source of entrepreneurship and innovation —the small
businesses that make a modern economy thrive.
Juliet B. Schor has argued that the middle class is defined by what she calls
“new consumerism” that defines the middle-class: a constant, “up scaling of lifestyle
norms; the pervasiveness of conspicuous, status goods and of competition for
acquiring them; and the growing disconnect between consumer desires and
incomes.” (Schor 1999)
In the world of the 21st century, the middle class consumers of North America
and Europe have been the source of demand, while low and middle income countries
in Asia have been the source of supply, but this has started to change. (Kharas 2010)
Urbanization goes – historically seen - hand in hand with the emergence of a
middle-class (households with daily expenditures between $10 and $100 per person
at purchasing power parity as it is defined by an OECD study3). Data from the World
Bank highlights the strong relationship between urban population share and GDP
per capita over time. The fast evolution for the East Asia & Pacific region countries
in the last three decades is noticeable as shown below. (Airbus 2013)
3 The Emerging Middle Class in Developing Countries – Working Paper No. 285
26
Figure 1: Evolution of the relationship between share of urban population and GDP per capita by
region between 1980 and 2011 (Source: OECD, Airbus)
Case studies will show the development of total population rates of the
countries that are in focus of the case studies as well as their urbanization rates that
can both be used for explaining the development of the airline industry.
2.5.5 The Impact of Falling Prices as a Result of Competition in the
Market
Another important growth factor in the commercial airline market development is the
ticket price as world transport growth is closely correlated to air ticket price
stimulation. (Airbus 2013)
Especially for leisure travellers, the price of air transport represents a large
proportion of the overall travel costs and influence the demand for leisure travel
immensely. Two studies have recently shown the negative elasticity between ticket
prices and air traffic: Graham and Shaw both determined that the higher ticket prices,
the lower the demand for flights is. (Graham and Shaw 2008)
During the last 30 years, average airfares decreased around 3% (inflation
removed) per year per unit of passenger traffic on a worldwide basis. More efficient
aircraft as well as improved productivity from airlines like aircraft utilization and
passenger load factors have made this development possible. (Airbus 2013)
27
Increasing competition and diversification of the business model of airlines,
such as the emergence of Low Cost Carriers (the business model of LCC’s will be
defined later) have a strong impact on prices as in other markets and industries.
Falling prices are, especially in developing and emerging economies, an extremely
important requirement in order to make the service of flying affordable for more and
more customers and thereby increase the number of customers. In general it can be
assumed that if there is more competition on a market. Especially if there is
competition not only at a single level on which traditional airlines are operating but
also on the Low Cost Carrier level, falling prices and an increase in demand can be
expected on all levels of the market. Depending on the degree and levels of
competition, case studies will classify whether competition can be seen as high or
low.
2.5.6 Alternative Forms of Transportation
Alternative forms of transportation have a large impact as a growth factor in the
airline industry. The more uncomfortable and slow alternative forms of transport are,
the more likely people are to have a look at air-transport. Depending on geographic
conditions like spread-out islands, for example in Indonesia or the Philippines, the
choice of alternatives is often limited to taking a ferry. One can conclude that the
worse the infrastructure of a country regarding its road and rail network is, the more
time consuming and uncomfortable traveling by these means of transport is and the
more likely people are to choose a plane instead. High speed railways are the most
serious competitors of the airline industry. In regards to comfort, price and time and
can be seen as one of the most serious threats to the growth of the airline industry.
Case studies will show the development of competing forms of transport, especially
trains services and identify whether there can be found negative impacts on the
airline industry.
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2.5.7 Government Regulations
Basis for regulations in the civil aviation sector is the so called Chicago Convention
that was signed in 1944 and came into effect in 1947 and the International Civil
Aviation Organization was formed. The Convention on International Civil Aviation is
now ratified by 191 states worldwide. It regulates for example the so called First and
Second Freedom rights in respect to scheduled international air services: the right
or privilege granted by one State to another State or States to fly across its territory
without landing and the right or privilege granted by one State to another State or
States to land in its territory for non-traffic purposes, e.g. refuelling. (International
Civil Aviation Organisation 2014a)
The role of government regulatory policies is important regarding the growth
of the North- and South-East-Asian airline industry. The rights that directly regard
transportation from one to another country are either agreed on in bi-lateral
agreements between two single countries (around 3000 of those are currently
existing worldwide) or multi-lateral agreements between more than two countries.
They differ whether they include fixed aspects such as capacity regulations and route
regulations or whether they are so called Open Sky agreements: The term “Open
Skies” is not a single, clearly defined concept. It refers to packages of a number of
distinct policy aspects, such as capacity deregulation and removal of price controls,
which lead to less regulated airline services. It is a strategy agreement opening up
aviation markets and can take place on bilateral, regional or multilateral levels. In
particular, Open Sky agreements support competition between airlines and -
depending on the level of the agreement - provide scope for airlines of a third country
to serve on a route between two other countries. A key element of Open Sky
agreements is that they bring more flexibility for airlines because they can then
develop their routes and networks as they choose, for example by choosing the size
of the plane operating on a certain route and the frequency how many times the
route is offered. All these measures, amongst others, are only part of the range of
components which might be found in a specific Open Skies package. (Monash
International 2004)
Other Freedom rights are defined by ICAO as follows:
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“Third Freedom of The Air - the right or privilege, in respect of scheduled
international air services, granted by one State to another State to put down, in the
territory of the first State, traffic coming from the home State of the carrier.
Fourth Freedom of The Air - the right or privilege, in respect of scheduled
international air services, granted by one State to another State to take on, in the
territory of the first State, traffic destined for the home State of the carrier.
Fifth Freedom of The Air - the right or privilege, in respect of scheduled
international air services, granted by one State to another State to put down and to
take on, in the territory of the first State, traffic coming from or destined to a third
State.
ICAO characterizes all "freedoms" beyond the Fifth as "so-called" because
only the first five "freedoms" have been officially recognized as such by international
treaty.
Sixth Freedom of The Air - the right or privilege, in respect of scheduled
international air services, of transporting, via the home State of the carrier, traffic
moving between two other States. The so-called Sixth Freedom of the Air, unlike the
first five freedoms, is not incorporated as such into any widely recognized air service
agreements such as the "Five Freedoms Agreement".
Seventh Freedom of The Air - the right or privilege, in respect of scheduled
international air services, granted by one State to another State, of transporting
traffic between the territory of the granting State and any third State with no
requirement to include on such operation any point in the territory of the recipient
State, i.e. the service need not connect to or be an extension of any service to/from
the home State of the carrier.
Eighth Freedom of The Air - the right or privilege, in respect of scheduled
international air services, of transporting cabotage traffic between two points in the
territory of the granting State on a service which originates or terminates in the home
country of the foreign carrier or (in connection with the so-called Seventh Freedom
of the Air) outside the territory of the granting State.
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Ninth Freedom of The Air - the right or privilege of transporting cabotage traffic
of the granting State on a service performed entirely within the territory of the
granting State.“ (International Civil Aviation Organisation 2014b)
Air travel is also positively influenced by the facilitation of visa policies. For
example more and more countries in South- and North-East-Asia offering Visa-on-
Arrival programmes or e-Visa that can be obtained via internet. Generally, an
increase in liberalization of the airline industry can be seen as one of the most
important growth factors as it enhances competition and efficiency. Case studies will
point out whether regulatory conditions for the airline industry have developed well
and how the status of liberalization of the airline industry can be classified.
2.5.8 Tourism as Growth Factor for the Airline Industry
Tourism is seen as an important economic- and growth-factor worldwide. A
relationship can be discerned between the provision of air passenger transport and
the promotion of tourism as a medium of economic development. (B. Graham 1995)
The airline industry is essential in providing a basis and supporting tourism
growth – and of course benefits from it likewise. (Oxford Economics 2009)
In Asia-Pacific tourism arrivals depend heavily upon air travel due to the
regions’ geographic situation with many widespread islands and long distances.
While in European countries there are lots of tourists arriving by land transport, for
example from neighbouring countries, this means of transport is not that common in
the Asia-Pacific countries. Countries such as Japan, Taiwan and the Philippines
nearly have a 99% share of foreign tourists arriving by air transport; around 80% of
the tourists visiting Korea also arrive by air. (B. Graham 1995)
Worldwide, more than 40% of international tourists are travelling by air today.
Similar to the discussion of the effects and contributions of aviation to the overall
economy, the airline industry’s contribution to the tourism sector are not only the
direct impacts to the tourism industry but also indirect effects that the tourism
industry itself creates. (Oxford Economics 2009)
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Oxford Economics concludes in this sense that “tourism in general, and air
tourism in particular, can benefit local economies and populations through other,
possibly less obvious ways. First, it is worth noting that air tourists include travellers
to and from their host country of work. Air links enable migrant workers to stay in
touch with family and friends sometimes more easily than other means of transport
would, so enhancing labour mobility. Labour mobility is beneficial for both the host
and the home country. The host country benefits from labour inputs with skills that
may not be readily available, such as foreign languages, specific skills, technological,
cultural or knowledge transfers. Second, the home country may benefit in various
forms whilst the migrant is away (e.g. in the form of remittances sent home to their
family), and upon the return of the migrant who brings new skills to his home country,
capital and possibly a network of business contacts”. (Oxford Economics 2009)
The Asia-Pacific region sports the big advantage of being an all-year-round
tourist destination, an extremely advantageous fact for the airline industry. Whilst,
for example, in Europe there is an absolute travel peak during the months of June
till August, there is no real peak in the Asia-Pacific area, even if Christmas time is
the high season there. That means that e.g. European airlines, especially those
clearly positioned in the leisure travel sector, sometimes have problems in both,
meeting the customer demand in the peak months and to cope with the low demand
during the winter months. Asia-Pacific carriers feature a relatively constant demand
all year round – the dream of every airline. As explained above, tourism can be seen
as an important growth factor for the airline industry. Case studies will show the
development of international tourist numbers (both arriving numbers of tourists
coming to a country as well as the number of inhabitants of a country that are
departing for the purpose of international tourism) and link them to the development
of total travellers regarding airlines and airports of the countries that are in focus.
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2.5.9 Other Airline Industry Growth Factors
There are, of course, a lot more factors that have influences on the development of
the airline industry. A few more will be presented in the following but will not be used
for the detailed analysis within the case studies.
Without any doubt, the oil price can be seen as one of the most important
growth factors in the airline industry as fuel is, besides labour cost, the highest part
of airline operation costs. The oil price is depending on a couple of factors, heavily
influenced by political tensions and happenings. The oil-price is indeed something
that changes on a global level for every airline in every country of the world, unless
airlines practice fuel hedging. Therefore, this factor is not of particular interest to this
study as there are no different regional developments although one can assume that
lower oil prices lead to lower ticket prices which certainly bring an increase in the
demand for flights.
Furthermore, the steadily rising numbers of students studying abroad also
has positive impacts on the airline industry. As of latest available numbers of 2009,
already one million students out of a total of 3.6 people studying abroad came from
the Asia-Pacific region: half of them still studying in the same region, whereas the
other half is mostly studying in North America and Western Europe. It can be
assumed that this has – at least in a lot of cases - a positive impact for South- and
North-East-Asian carriers. (Airbus 2013)
3 Past Development of the Airline Industry
3.1 Introduction to Asia-Pacific Airline Industry
3.1.1 Development of the Airline Industry until 2000
Two decades past, Asia already accounted for around 30 percent of world-air-travel
and in 1996 the Asia-Pacific market was valued at USD 10 billion. (Straits Times
1998)
Competition on the air travel market has always been fierce and became more
intense two decades ago when travel volumes began slackening, falling to growth
33
rates slightly below ten percent after average growth rates between 11-12 percent
during the 1970s and 1980s. Seen on an international level, high single-digit growth
rates were still relatively high compared to those in other regions of the world, but on
a regional level it put pressure on Asia-Pacific airlines and intensified competition,
for example by price slashing. (Chan 2000)
The years between 1990 and 1993, the years before the two decades that
are in focus of this thesis, were very difficult for the airline industry. Main factors that
led to this situation were an economic recession beginning in 1990 and the Gulf War
in 1991. (Hanlon 1996)
Especially in Japan, at this time accounting for about 60% of international air
traffic in Asia, the recession led to falling passenger numbers and unprofitability. To
go against this and compete with other airlines, prices on popular routes were
lowered by around 20 percent by many airlines in Asia-Pacific. (Asian Business
Review 1996)
This measure was accompanied by raising quality- and service standards.
The industry’s profitability was hurt massively because of falling yields on the one
hand and growing costs for better quality and service on the other. IATA director-
general Pierre Jeanniot warned in 1997 that price-slashing strategies as they had
been seen in the past years will “have a potentially devastating effect on the
industry’s future” and also pointed out that “the industry needed urgently to protect
its yields as well as continue to drive unit costs down”. During the time from 1995 to
1996, airlines in Asia-Pacific indeed managed lowering their unit costs – but yield
dropped 6 times faster than unit costs. (Business Times 1997)
In 1997, Singapore Airlines Chairman Dhanabalan explained the long-time
strategy of his company regarding competitive tactics like price dropping in Asia-
Pacific: “Strong competition is not new to SIA. Every now and then, some airline, in
an attempt to gain market share, will resort to senseless heavy discounting. It is a
short-term phenomenon. We take such competition in our stride… If others resort to
cutting fares, we can certainly do the same and we have a far better financial strength
to cut fares and last longer than anyone else. But we ask ourselves first whether it
34
is necessary to do that… So far, we have had no need to do so”. (The Sunday Times
1997)
A couple of airlines, most notably Singapore Airlines differentiated
themselves from their competitors by high-quality service and not just competing on
a price and cost basis. During the boom years before and following the economic
slowdowns, not only caused by the Asia Financial crisis in 1997 and 1998, a lot of
Asia’s top airlines developed themselves into major world players, benefitting from
Asian service hospitality and charm. (Chan 2000)
3.1.2 Defining and distinguishing Full Service Airlines and Low Cost
Carriers
Before pointing out some important developments in LCC sector in North East Asia,
this paper will define the differences between the so- called Full-Service-Carriers,
often also named Legacy Airlines, and Low-Cost-Carriers, sometimes also called
Budget Airlines. Today, Legacy Carriers, also called traditional airlines or Full
Service Carriers/Airlines can be defined as mature airlines with large, complex fleets
and global hub-and-spoke networks. All of them share various key characteristics as
Marks and Malik define:
“They have entrenched labor forces with mature seniority systems, and highly
paid pilots, flight attendants and mechanics. This restricts cost-effective
capacity reduction and the ability to evade new low-cost international
competition.
They have both international and domestic operations, with major hub
operations where passengers transit from domestic networks, often on
affiliated regional carriers to long-haul flights. Most have affiliate agreements
with unbranded regional airlines that provide feed from secondary
communities at major hubs. At each hub, most legacies have preferential gate
and slot positions that protect them from new market entrants. Inter-airline
alliances integrate each legacy’s network into a worldwide system, and anti-
trust immunity protects them.
35
They have mixed fleet types to optimize capital resources across a wide
variety of short- and long-haul routes. Most legacies operate both short- and
long-haul Boeing and Airbus equipment, increasing maintenance and crew
costs.
They have complex on-board service with at least Business and Economy
Class services for both domestic and international routes. Most legacies
operate at least five different cabin products across their networks.
They have pervasive, multi-channel distribution programs with extensive
corporate contracts, Internet and telephone reservations. Legacy
reservations and fare systems are based on global distribution systems that
provide high-cost connections to travel agencies and corporate travel
departments. Legacies have recently introduced Internet sites that connect
consumers directly to their internal technology systems.
They have loyalty programs with free flights, upgrades and status recognition
that capture passengers. These programs have been downgraded in recent
years, reducing their attractiveness to premium passengers.
Legacy carriers have extensive debt obligations that date from decades of
unprofitable operations. Some have received government loan guarantees
and others operate under bankruptcy court protection.
The strongest legacy carriers also exhibit significant route and airport
protection, resulting from differential rates of liberalization around the world.
Certain legacy airlines enjoy wide access to key business markets, including
London/Heathrow, Paris/CDG and Tokyo/Narita.
Legacies are struggling to take high-cost infrastructure and optimize it for
lower-revenue regional routes. They have used their combined networks,
both regional and international, to withstand competition. But low-cost carriers
now have the potential to replicate those networks in a new, less costly
operating model.“ (Marks and Malik 2004)
Virtually all Low Cost Carriers share some important characteristics that are
essential for their cost structure. The Low Cost Carrier pioneer Southwest Airlines
36
can be seen as the original LCC model: All is based on the principle “you get what
you pay for”, meaning the airfare you pay is good for being transported from A to B,
but there are no extras like check-in luggage or free snacks. Fares therefore are
generally low and simple, they are point-to-point meaning that there is no transfer to
other flights included. LCC usually sell their tickets directly via phone or internet,
sometimes supplemented by travel agents. Fleets of LCC are often singly type fleets,
made up of mid-range planes like Airbus 320 or Boeing 737 aircraft which brings
lower maintenance costs as well as an increased flexibility in case of a plane change.
Low Cost Carriers usually have high utilization rates of more than 11 hours per day.
They fly in a single-class layout with high-density seating. They usually offer a very
good punctuality as their network is less complex and they do not have to wait for
connecting passengers as connection flights are normally not offered in the original
LCC model. LCC operate on domestic or regional routes within a time range of
usually not more than 3 hours and offer high frequencies. Often, LCC operate to and
from airports that are classified as secondary, meaning there is not as much traffic
and congestion as at primary airports. However, for South- and North East Asia this
is not really true as there are relatively few secondary airports that LCC operate at.
LCC usually have very short turnaround times between 20 and 30 minutes.
Companies grow very quickly, growth rates of 10 to 20 percent can be often found.
As LCC normally sport high productivity and efficiency rates, their business model is
often extremely successful. (Doganis 2001)
The enormous success of Low Cost Carrier Southwest Airlines in the United
States of America for example as well as the prosperity of Ryanair in Europe have
inspired airline entrepreneurs in North- and South East Asia. But, for various reasons
that will be explained later, the Low Cost Carrier airlines have developed rather
differently in South- and North East Asia. Therefore, this paper will present the
development of the North East Asian LCC’s in one dedicated chapter together for
China and Japan and – for information only also in South Korea. South East Asian
Low Cost Carriers will be analysed in more detail as the Air Asia Group will be an
airline that is analysed within the case study for Malaysia.
37
3.2 Airline Industry Development in North-East-Asia
3.2.1 Past Development of Low Cost Carrier Airlines in North East Asia
As already mentioned before, LCCs are a much more recent phenomenon in North
East Asia than for example in the United States of America or Europe. Meanwhile,
LCC’s have developed in North East Asia but still have a relatively low share in North
East Asia’s airline field. 2001 is the first year where statistics regarding the LCC
penetration of the North East Asian airline market are available and show that LCC’s
then accounted for 0.4% of the total seats in the region. Though this share has
continuously risen, in 2006 still 1.8% of the total seat capacity in the North East Asian
market came from Low Cost Carriers. A larger growth of share can be found from
2009 (3,9% share) until 2012 which is the latest statistic data available: LCC’s then
accounted for a 9,5% share. (Centre for Aviation 2014)
In the case of Japan, 1998 is the year when the country’s first two Low Cost
Carriers entered the market: Skymark Airlines and Air Do. Both airlines, still existing
today, entered the market by offering discounts of up to 50% to its competing
traditional Full Service Airlines‘ fares. Skynet Asia Airlines in 2002 entered the
Japanese LCC market, followed by Star Flyer Airlines in 2006. (Zhang, et al. 2008)
The year 2012 brought 3 new Low Cost Carriers to the country: Jetstar Japan,
(a Joint-Venture between Quantas and its daughter company Jetstar, Japan Airlines
and Mitsubishi Corp.), AirAsia Japan (of its shareholders All Nippon Airways and Air
Asia) and Peach Aviation, where All Nippon Airways again holds shares. It stands
out that both big FSA’s in Japan by now have a large interest to participate in the
success and rising share’s that Low Cost Carriers have. By the end of 2012,
Japanese LCC’s had a share of 19% in the domestic market. (Centre for Aviation
2014)
Nearly half of this share operated by Skymark that carried a total of more than
six million domestic and international passengers in 2012. (Skymark Airlines 2014)
The emergence of Low Cost Carriers in South Korea has taken place later
than in Japan: Hansung Airlines and Jeju Air were the first to LCC’s to enter the
South Korean market in 2005 and 2006, offering fares about 30% cheaper than its
38
Full Service competitors Korean Air and Asiana. They were followed by Jin Air and
Air Busan some years later. (Zhang, et al. 2008)
In 2012 there were five South Korea LCC’s operating, Jeju Air being the
biggest. All South Korean LCC’s share a characteristic: They all operate the so called
“Korea-Style LCC model”. This means that their model has reduced some costs
when comparing it to a Full Service Airline, but is still far away from being able to
compete with LCC’s coming from abroad. Some of South Korean LCC’s still offer
check-in luggage, food and drinks complimentary – things that the normal LCC
model does not offer and benefits of by reduced costs. LCC market leader Jeju air
has started changing from the Korea-Style LCC model to the normal one in 2013.
(Centre for Aviation 2014)
The same picture of a late start can be drawn for China’s LCC industry. It had
a late start in 2005 with the establishment of Spring Airlines. West Air can be seen
as the countries‘ second LCC. It has started its operations in 2010 and is the latest
addition to the Chinese LCC market. (Centre for Aviation 2014)
Others have not followed until as most companies believe that the current
regulatory conditions in the country are not yet ripe for LCC operations. (Zhang, et
al. 2008)
By contrast to that one has to see that Spring Airlines is a highly successful
airline that has grown rapidly within the last years: operating now with around 40
planes and having carried about 10 million passengers last year, more than twice as
much as it carried in 2009, 4.3 million passengers. (Centre for Aviation 2014)
A big problem for LCC’s in China is the lack of cheaper secondary airports.
Today, at the main airports of the country they pay almost the same airport charges
as FSA’s although LCC terminals are not existent or under-developed. (Zhang, et al.
2008)
39
3.2.2 Case Study 1: China
3.2.2.1 Introduction to the Development of Aviation in the P.R.C.
The airline industry of China was established in 1954 as an instrument for
administration, trade, and tourism. Following reforms and the country’s opening -up
policy from 1978, the civil aviation industry in China has developed rapidly as it got
rid of strong regulations mainly regarding and limiting international traffic. (Comtois
2009)
During the past two decades, the airline industry in China experienced
extraordinary growth in terms of both size and profitability.
China’s development from a nation having only one single national airline in
the 1980’s to one having dozens of airlines and being the world’s second-largest
aviation market today is remarkable. Two of the nation’s carriers are now amongst
the world’s Top 10 by size but it remains questionable whether they can compete
with other nations’ airlines in terms of cost and efficiency. A reason can be seen in
China’s GDP that has slowed down in the past years from double-digit growth rates
to still high single-digit growth. Few years ago, this was unthinkable and Chinas
government had interwoven the planning of airline growth with GDP forecasts deeply
for a long time. This lead to overcapacity and a weakening performance of Chinese
airlines. The recent government changeover in May 2013 brought a substantial
redirection of China’s economic leadership and can be seen as an important turning
point regarding the regulation of the airline industry. (Centre for Aviation 2013)
3.2.2.2 Development of Airline Industry Growth Factors in China
3.2.2.2.1 Economic Growth Development in the P.R.C
“Since the late 1970s China has moved from a closed, centrally planned system to
a more market-oriented one that plays a major global role - in 2010 China became
the world's largest exporter.” (Central Intelligence Agency 2014c)
China has experienced massive economic development within the last two
decades, impressing with double-digit GDP growth numbers in ten years of the last
40
two decades and high single-digit growth in the others. The country’s economy grew
a yearly average of 10,2% during the last two decades. GDP per Capita (PPP) in
current international US-Dollar was 1.185 back 20 years ago and has increased to
9.083 USD in 2012. This development can be regarded in having had very positive
effects onto the development of the airline industry in China.
3.2.2.2.2 Population Development and Urban Population in China
China’s population has increased from 1.18 billion people in 1993 steadily up to 1,35
in 2012. This is an increase of only 14% during the last two decades and as a result
for the relatively little population growth, China’s one child policy can be named as
one important reason. Demographics in regard to the urban population by contrast
have changed massively during the last 20 years. The country’s urban population
share of less than 30% in 1993 increased to nearly 52% in 2012 and can be seen
as an indicator that China’s middle class has increased significantly during the past
two decades. For the airline industry, this is a positive development and can be seen
as a positive growth factor.
3.2.2.2.3 Development of Competition
Competition on the Chinese aviation market has always been regulated and was
very restricted. Therefore, prices were high. As the country has only had one LCC
during the past decade, whose prices were mostly regulated by the CAAC as well,
the level of competition in China can be described as low for the past two decades.
However, this is likely to change in the future and might then be seen as an important
growth factor which it cannot be regarded today.
3.2.2.2.4 Development of Alternative Transportation in China
Although the Chinese market offers incredible possibilities, especially in the
domestic market, there have also already been some cutbacks on certain routes,
41
such as the line between Beijing and Shanghai. When the new G-High-Speed-Train
route was opened in 2011 and travel time dropped around 8 hours to only a bit more
than four hours on this route, airline companies realized quite quickly that it would
be very difficult to compete with these high-speed-trains and therefore cancelled a
significant amount of the – up to this time – more than one hundred daily flights
between the two cities.
China is continuously building more and more high-speed railways and will
complete its backbone network of four north-south and four east-west high-speed
lines by next year, then having 18.000 kilometres of high speed railways. Many of
the country’s high speed railways lines have seen passenger growth rates exceeding
20% per year since around 2008. (Qiao 2013)
These developments can be seen as a serious threat for the airline industry
as high speed railways directly competes with airlines. Having serious competition
of a network of 18.000 kilometers will likely continue to have an impact on prices and
yields of the airlines. The total number of railway tracks in China has also risen during
the past two decades from around 54.000 kilometers to more than 66.000. Moreover,
passenger numbers have more than doubled from around 350.000 million
passenger kilometers in 1993 to nearly 800.000 in 2012.
3.2.2.2.5 Development of Chinese Government Regulations
Many aspects in regard to the airline industry are still regulated in China although
there have been a lot of changes in the last twenty years.
A regulation that is still in place concerns the fleet planning and purchase of
airlines as explained by Zhang, et al: „It is required by law that purchasing of aircraft
built by overseas companies must be approved by the National Development and
Reform Commission once every year“. This means that the Government of China
has total control over the development of airlines and can steer the speed and
intensity of growth for every airline. As this regulation shows that aircraft purchase
is difficult in China wet-leasing of aircraft could be a solution. Yet that was made
impossible in 2005 when the CAAC announced that it will no longer process
42
applications for the permission of wet-leasing aircraft.” This brings extremely
uncertain planning perspectives for airlines and this step shows that there was a
change which did however not benefit the airline industry at all. Wet-leasing is not
the only thing that had been restricted in 2005. Shortages of well qualified pilots are
a big problem in the country as training is expensive and takes long. To protect this
investment, that is paid by the Chinese airlines, free flow of pilots across airlines has
been made more restricted and regulated by CAAC: a compensation to the old
employer has to be paid by the new employer, ranging between RMB 0.7 and 2.1
million. Fuel purchase is still regulated in the PRC the way that China Aviation Oil is
the only aviation fuel provider. This means China Aviation Oil has the monopoly and
there is no chance of alternatives. (Zhang, et al. 2008)
But the Chinese aviation market has also experienced major changes in
regard to government regulations during the past decade that can be seen as
positive for the airline industry.
One important point is that the Civil Aviation Administration of China allowed
both a couple of state-owned as well as privately owned carriers to enter the Chinese
market. From 2005 on, foreign ownership of airlines has been allowed, up to a cap
of 49%. (Wang, et al. 2014)
This regulation together with the 49% cap can be found in a lot of countries in
the Asia-Pacific region.
For decades, entry permits for highly frequented routes were required. There
has been the additional restriction that it normally was not allowed that routes were
served by more than three carriers. (Zhang, et al. 2008)
Except for a few large airports, e.g. Beijing, Shanghai and Guangzhou, route
regulations have been largely removed by now. (Wang, et al. 2014)
The CAAC explains that for airports where regulations have not been
removed in 2005, this was done because of capacity restrictions. These three
airports are the home-bases of China’s “big three’’ state-owned carriers, namely, Air
China, China Southern Airlines and China Eastern.
CAAC long restricted the pricing of the airline industry in China as it set prices,
depending on the distance of the flight, allowing carriers to increase this price by a
43
maximum of 25% or decrease by not more than 45%. Offering a 45% discount on
the set price was often normal among Full Service Airlines. (Zhang, et al. 2008)
This shows that there was no possibility for Low Cost Carriers to offer their
flights cheaper.
China’s Civil Aviation Administration has also liberalized the airline market so
that airlines are allowed to set their own prices in most cases today. New distribution
channels were allowed in addition to traditional ticket agencies, such as ticket sales
through the airline’s websites or internet travel agencies. Competition amongst
airports has also been made possible through commercializing and privatizing.
(Wang, et al. 2014)
Although this paper is focussing only on the People’s Republic of China, it is
worth mentioning that China and the Republic of China (Taiwan) have started to
introduce regular non-stop passenger flights on July 4th, 2008 after having been
political rivals for six decades. This step has been hailed as tremendous for the
Chinese reunification policy and also has large economic effects, as there are
currently more than 15 airlines - both Chinese and Taiwanese - that operate flights
across the Taiwan Strait. This step also proves that China is continuously liberalizing
its airline industry. Of course, the Cross-Strait Air Transport Agreement signed by
Taiwan and China and the overall softening of relations between both is mainly
trade-driven. The lower travel times and costs that come with direct cross-strait
flights will, for example, further increase Taiwanese business contacts with China as
well as facilitate touristic visits from citizens of one country to the other, deemed an
important economic factor by both. (Chang, Hsu and Lin 2011)
Compared to other countries worldwide, the Chinese market is still in an early
stage of development as there are many regulations that prevent a “free” market.
This has been illustrated by the example of Lufthansa, which had not been granted
permission to fly its Airbus A380 to Shanghai for political reasons like the Chinese
blockade of emission certificates introduced by the European Union for years.
(Austrianwings 2012)
Concluding all this it can be said that the P.R.C. has had very regulatory
conditions for its aviation industry that did not give the opportunity for real
44
competition and development. Especially in the light of the further economic opening
up of the country and the abolishment of many regulatory conditions by the CAAC,
the years 2013 and 2014 can be seen as a turning point for the regulatory conditions
in regard to the airline industry in China which will soon result in increasing
competition and the emergence of new carriers.
3.2.2.2.6 Tourism Development in the P.R.C
Tourism plays a big role in China. Chinese people love traveling and can increasingly
afford to do so. Furthermore, the country has a lot of sights and their own culture
which has always attracted visitors. This means, both incoming and outgoing tourism
plays a big role in the country – a fact from what the airline industry is benefitting a
lot, especially in regard to international tourism. Data available from the World Bank
in regard to international tourism arrivals and international tourism departures for
China dates back as far as 1995, when more than 20 million people were visiting the
country. 4.5 million Chinese inhabitants visited a foreign country at this time. Both
numbers have increased during the past 18 years. The number of incoming tourists
has risen continuously by around 3-5 million people yearly with the exception for the
year 2003. This was when the SARS crisis occurred and visitors refrained from going
to China as the country was the originating point of the crisis and amongst the most
affected countries, resulting in a drop from 36.8 million tourists that arrived in 2002
to slightly below 33 million for the year 2003. It can be seen that the SARS effect
was only short-term and had no negative effects on a long-term basis as numbers
made an extreme jump to more than 41.5 million arrivals for 2004 then. Until 2012
the number of arriving international tourists in the P.R.C. has grown to nearly 58
million. It can be concluded that tourist arrivals have nearly tripled in the past two
decades. The growth of Chinese travellers that visit a foreign country by contrast has
nearly multiplied by 20 within the last 18 years from 4.5 million travellers to more
than 83 million in 2012. This is a massive change and does only respect the
international level of tourism. It can be assumed that the airline industry additionally
45
to international tourism benefits from domestic tourism, especially in a large-sized
country like the P.R.C. where distances are enormous.
3.2.2.3 Airports in China
China is a country that offers nearly two hundred commercially used airports today.
Many new airports have been constructed and have become operative since the
country’s opening policy that began in 1978, with Beijing Capital International Airport
being number one with more than 83 million passengers handled in 2013. In terms
of cargo handled, Shanghai’s largest airport “Pudong International Airport” is the
absolute number one: though it handled “only” around 47 million passengers last
year, which ranks it number three in terms of passengers after Beijing and
Guangzhou, it handled nearly three million tons of cargo that arrived there or left the
airport. That is roughly double the amount of cargo-freight handled by Beijing Capital
Airport. In addition, it must be taken into account that Shanghai has two airports
serving the city. The total passenger number handled by both is slightly more than
82 million and slightly less than 3.5 million tons of air freight passed through them.
The following table shows the development of passenger numbers and cargo
at today’s ten largest airports in the country (by handled passengers) for the years
2000 (earliest data available) and 2013:
Table 1: Development of passenger and cargo numbers at today's ten largest airports in the P.R.C.
between 2000 and 2013
Airport Passengers in Mio. Cargo in Mio. Tons
2000 2013 2000 2013
1 Beijing Capital 21.7 83.7 0.56 1.84
2 Guangzhou Baiyun 12.8 52.5 0.42 1.31
3 Shanghai Pudong 5.5 47.2 0.22 2.92
4 Shanghai Hongqiao 12.1 35.6 0.49 0.44
5 Chengdu Shuangliu 5.5 33.4 0.12 0.50
6 Shenzhen Bao’an 6.4 32.3 0.17 0.91
46
7 Kunming Wujiaba 5.6 29.7 0.10 0.29
8 Xi’an Xianyang 3.9 26.0 0.05 0.18
9 Chongqing Jiangbei 2.8 25.3 0.06 0.28
10 Hangzhou Xiaoshan 2.5 22.1 0.06 0.37
Sources: (Civil Aviation Administration of China 2000-2013)
The table shows the enormous growth of the aviation industry in China, both
on the passenger and the cargo side. Most airports have at least tripled the amount
of passengers and cargo handled from 2000 to 2013. The only exemption to this
trend is Shanghai’s Hongqiao airport: With the opening of Shanghai Pudong
International Airport on October 1st 1999 and its establishment as primary airport of
the city, all growth in cargo and most passenger growth took place there instead of
at Hongqiao. To confirm the growth of Chinese aviation, we will now take a look at
the entirety of Chinese airports. In the year 2000, China only had 143 airports that
were classified as commercial airports and included in the statistics. Private aviation
is therefore not included in these numbers; only scheduled commercial passenger
and freight traffic are. Total passenger and cargo numbers for all airports in China
are shown below for the time span between the years 2000, which is the oldest data
that is available, and 2013.
Table 2: Development of passenger and cargo numbers at all airports in the P.R.C. between 2000
and 2013
All Airports 2000 2004 2007 2010 2013
Passengers in Mio. 133.7 241.9 387.6 564.3 754.3
Cargo in Mio. Tons 3.39 5.53 8.61 11.29 12.58
Sources: (Civil Aviation Administration of China 2000-2013)
These numbers do not only confirm the extremely high growth of the country’s
ten largest airports above but the growth of all other airports as well. China counted
133.7 million airline passengers in 2000 and that number more than quintupled to
nearly 755 million passengers in 2013. This amounts to an average growth in airline
passengers of more than 13% annually throughout the entire country for the past 14
47
years. The cargo growth was extremely high as well with its amount nearly
quadrupling but could not reach the level of passenger growth. For the years 2000
to 2013, the average nationwide growth per year was slightly below 10% percent in
the cargo sector.
Generally one more thing can be said: though many airports in China are
newly built, they already cannot cope with the increasing demand anymore which
hinders growth. (Zhang, et al. 2008)
3.2.2.4 Airlines in China
3.2.2.4.1 Introduction to Airlines in China
Chinese Airlines are defined as all airlines that currently have a valid Air Operator
Certificate issued by the Civil Aviation Administration of China. According to this
definition, there are more than 30 active airlines in China today. Air China was
established on July 1st 1988 as a result of the Chinese government's decision to
split the operating divisions of the Civil Aviation Administration of China into six
separate airlines: Air China, China Eastern, China Southern, China Northern
(merged with China Southern 2002), China Southwest (taken over by Air China in
2002), and China Northwest (from 2002 part of China Eastern). China Southern
Airlines, China Eastern Airlines and Air China are the three biggest airlines in China
today; they are all state owned. (World Airlines 2007)
These three airlines will be reviewed in the following.
3.2.2.4.2 Air China
3.2.2.4.2.1 Introduction to Air China
Air China is a Full Service Carrier and China’s second largest airline. The company
is operating both domestically and internationally. The company has its main base
in Beijing. It has operated on an average stage length of 1102 miles for the past 20
years: 1302 miles in 1993 and this number slowly decreased to 1009 miles in 2011.
48
3.2.2.4.2.2 Statistical Data for Air China
Table 3: Statistical Data for Air China, 1993-2011
Financial Data 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Passenger Revenue 1.278 1.411 1.750
Total Revenue 1.040 1.048 1.299 1.340 1.280 1.386 1.400 1.668 1.769 2.140
Operating Profit 27 32 56 163 227 240
Operating Ratio 97,4% 97,0% 95,7% 90,2% 87,2% 88,8%
Net Income after Taxes 33 36 56 -78 5 14
Yield - ¢ per RPM 11,35¢ 11,39¢ 11,92¢
Cost - ¢ per ASM 9,63¢ 9,03¢ 9,89¢ 8,57¢ 7,95¢ 8,83¢
Operating Data
RPMs (mil.) 6.778 7.137 8.216 8.596 8.216 9.074 9.702 11.257 12.391 14.687
ASMs (mil.) 10.527 11.262 12.569 13.027 12.569 15.238 15.784 17.562 19.397 21.507
Load Factor 64,4% 63,4% 65,4% 66,0% 65,4% 59,5% 61,5% 64,1% 63,9% 68,3%
Passengers (000) 4.515 5.251 6.412 6.641 6.412 6.454 6.645 7.942 8.769 10.432
Flight Stage (miles) 1.302 1.194 1.115 1.094 1.115 1.147 1.190 1.156 1.151 1.191
Number of Aircraft 48 52 48 48 53 59 62 65 67 120
Average Seats / Aircraft 212 213 213 204 213 213 213 213 213 213
Utilization (hours/day) 6,32 6,2 6,95 8,66 6,88 8,45 8,06 8,53 9,08 7,08
Profitability Index -1,29 -0,67 -0,69
Efficiency Index 4,07 3,93 4,55 5,72 4,50 5,03 4,96 5,47 5,80 4,84
Financial Data 2003 2004 2005 2006 2007 2008 2009 2010 2011 Ø past
19y
Passenger Revenue 2.220 3.343 3.861 4.721 5.755 6.260 6.450 8.900 12.950
Total Revenue 2.693 4.050 4.259 5.043 6.192 6.556 6.756 9.368 15.260
Operating Profit 276 542 352 253 477 -250 274 1293 971 329
Operating Ratio 89,8% 86,6% 91,7% 95,0% 92,3% 103,8% 96,0% 86,2% 93,6% 92,8%
Net Income after Taxes 11 306 279 399 399 -1.374 638 1.216 1.095
Yield - ¢ per RPM 10,81¢ 11,68¢ 11,93¢ 12,67¢ 13,87¢ 15,33¢ 14,24¢ 16,75¢ 17,48¢ 13,29¢
Cost - ¢ per ASM 7,76¢ 8,81¢ 8,97¢ 9,78¢ 10,85¢ 12,52¢ 11,03¢ 12,24¢ 15,82¢ 10,11¢
Operating Data
RPMs (mil.) 20.535 28.616 32.375 3.729 41.485 40.838 45.305 53.120 74.104
ASMs (mil.) 31.134 39.799 43.541 48.999 52.668 54.354 58.788 65.993 90.348
Load Factor 66,0% 71,9% 74,4% 76,0% 78,8% 75,1% 77,1% 80,5% 82,0% 69,67%
Passengers (000) 17.793 24.135 27.533 31.315 34.752 34.152 39.665 46.008 66.850
Flight Stage (miles) 1.006 1.036 1.019 1.033 1.049 1.056 1.024 1.053 1.009 1.102
Number of Aircraft 128 148 170 197 209 227 244 263 387
Average Seats / Aircraft 191 192 182 175 174 178 178 178 175 212
Utilization (hours/day) 8,50 9,98 10,22 10,44 10,33 9,83 9,84 10,26 10,65 8,75
Profitability Index -0,63 -0,41 -0,09 -0,15 0,08 -1,01 -0,05 1,24 -1,49 -0,43
Efficiency Index 5,61 7,18 7,60 7,93 8,14 7,38 7,59 8,26 8,73 6,17
Sources: Air China Yearly Reports 1994-2012
49
3.2.2.4.2.3 Financial Development Analysis
For all years, financial data is available. In the past two decades, Air China managed
to gain an operating profit with one single year as exception: 2008, probably a result
of the World Financial Crisis, resulted in a negative operating profit for the company,
a minus of 250 million USD is recorded. On an average basis for all years that
operation profit data is available, an average yearly operation profit of 329 million
USD had been achieved. As this data represents 15 years of the past two decades,
this number can be considered representative. Air China managed to achieve
excellent operating ratios below 90% in the years between 2001 and 2004 as well
as in 2010. The average financial operation ratio stands at 92.8% for the 15 years
were data is available and is also considered representative of the last 2 decades.
3.2.2.4.2.4 Operational Development Analysis
Air China grew quickly during the past 20 years, also because of mergers that have
been mentioned already. Back in 1993, the company was operating with a fleet of
48 airplanes and offering 10.527 million ASM’s. 19 years later in 2011, the fleet was
around 8 times bigger than back then and the company was offering nearly 9 times
as much seats. Passenger numbers grew from 4.5 million in 1993 to around 67
million in 2011. This increase was not only possible because of the larger fleet but
also driven by higher load factors: starting in 1993, a load factor of below 65% was
achieved. For the next decade then, no big improvements were achieved but from
the company continuously managed to increase their planes’ load factor and
reached more than 80% load factor for the first time in 2010. The average load factor
for the past two decades stands at slightly below 70%. Continuous development of
efficiency improvement can also be found in regard to the utilization time of Air
China’s airplanes. While the company used its aircraft less than 7 hours daily
between 1993 and 1995, Air China steadily raised utilization times over the years,
reaching a rate of more than 10 hours from 2005 onwards with exception of the
World Financial Crisis’ years 2008 and 2009.
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3.2.2.4.2.5 Analysis of Key Indicators of Airline Development
During the past 12 years for which yield data is available for Air China, the company
was able to increase this figure every year - except for the year 2003, the year when
the SARS-crisis had their negative impacts on the airline industry. Until 2006, Air
China was able to produce at costs of less than 10 US-Cent per ASM. However, cost
have increased and latest numbers for 2011 show a cost of nearly 16 Cent per ASM.
The Profitability Index for Air China that can be calculated for the years 2000 until
2011 shows that 2007 was the most profitable year for the company, reaching an
index of 0,08. 2011 is the year with the lowest Profitability Index, -1,49, driven by
high costs for producing ASM’s. The average Index for the last 12 years is -0,43. In
terms of efficiency as already shown in the operational data section, Air China was
able to improve from year to year. Scoring and Efficiency Index of only 4,07 that
shows a very inefficient use of resources, the company reached Indexes around 8
from 2005 to 2011. For the last two decades, Air China reached an average
Efficiency Index of 6,17.
3.2.2.4.3 China Southern
3.2.2.4.3.1 Introduction to China Southern
China Southern is the largest of the “Big Three” Chinese carriers. It is a Full
Service Carrier with its main base in Guangzhou and focusing on regional
destinations in Asia-Pacific with an average stage length of 752 miles for the past 20
years: 698 miles in 1993 and this number slowly increased to 830 miles in 2011.
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3.2.2.4.3.2 Statistic Data for China Southern
Table 4: Statistical Data for China Southern, 1993-2011
Financial Data 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Passenger Revenue 1.280 1.428 1.601 1.819 1.897
Total Revenue 580 900 1.100 1.460 1.541 1.425 1.606 1.833 2.039 2.177
Operating Profit 95 64 47 93 283 60 223 143 142 245
Operating Ratio 83,6% 92,9% 95,7% 93,6% 81,7% 95,8% 86,1% 92,2% 93,0% 88,8%
Net Income after Taxes 106 46 47 93 137 -66 10 61 41 90
Yield - ¢ per RPM 11,60¢ 12,74¢ 12,27¢ 12,02¢ 10,95¢
Cost - ¢ per ASM 8,16¢ 7,44¢ 11,00¢ 9,65¢ 7,70¢ 7,50¢ 7,22¢ 7,82¢ 7,83¢ 7,27¢
Operating Data
RPMs (mil.) 4.554 7.980 6.859 10.019 10.682 11.036 11.210 13.048 15.130 17.323
ASMs (mil.) 5.942 11.240 9.569 14.159 16.336 18.190 19.145 21.617 24.230 26.579
Load Factor 76,6% 71,0% 71,7% 70,8% 65,4% 60,7% 58,5% 60,4% 62,4% 65,2%
Passengers (000) 6.460 11.300 9.722 14.521 14.560 14.455 14.360 16.125 18.478 20.682
Flight Stage (miles) 698 722 698 686 734 762 786 846 701 720
Number of Aircraft 53 61 59 59 72 74 78 80 85 91
Average Seats / Aircraft 162 173 176 171 179 178 176 172 172 172
Utilization (hours/day) 5,57 7,59 6,86 10,12 9,78 9,73 9,92 10,93 11,75 12,17
Profitability Index -0,46 0,23 -0,41 -0,33 -0,13
Efficiency Index 4,27 5,39 4,92 7,16 6,40 5,91 5,80 6,60 7,33 7,93
Financial Data 2003 2004 2005 2006 2007 2008 2009 2010 2011 Ø past
19y
Passenger Revenue 1.813 2.549 4.197 5.221 6.542 7.279 7.328 10.164 12.637
Total Revenue 2.111 2.897 4.682 6.078 7.188 7.983 8.331 11.317 14.017
Operating Profit 55 110 -160 40 208 -944 211 930 675 133
Operating Ratio 97,4% 96,2% 103,4% 99,3% 97,1% 111,8% 97,5% 91,8% 95,2% 94,4%
Net Income after Taxes -43 -6 -226 26 -243 -696 48 858 944
Yield - ¢ per RPM 7,51¢ 7,58¢ 11,18¢ 12,26¢ 13,00¢ 14,18¢ 12,77¢ 14,80¢ 16,68¢ 12,11¢
Cost - ¢ per ASM 5,52¢ 5,73¢ 9,03¢ 10,17¢ 10,43¢ 12,83¢ 10,66¢ 11,88¢ 14,26¢ 9,06¢
Operating Data
RPMs (mil.) 24.126 33.611 37.549 42.576 50.322 51.332 57.398 68.692 75.774
ASMs (mil.) 37.272 48.662 53.639 59.389 66.949 69.575 76.193 86.675 93.555
Load Factor 64,7% 69,1% 70,0% 71,7% 75,2% 73,8% 75,3% 79,3% 81,0% 69,62%
Passengers (000) 28.409 39.038 43.228 48.512 56.522 57.961 65.959 76.078 80.545
Flight Stage (miles) 744 756 761 766 770 764 751 789 830 752
Number of Aircraft 195 222 226 258 280 286 301 335 347
Average Seats / Aircraft 165 165 164 163 161 164 165 161 161 168
Utilization (hours/day) 10,91 9,65 10,09 10,38 10,86 10,64 11,09 11,92 12,08 10,11
Profitability Index -0,66 -0,49 -1,20 -1,38 -0,65 -2,37 -1,04 -0,14 -0,75 -0,70
Efficiency Index 7,06 6,67 7,06 7,44 8,17 7,85 8,35 9,45 9,78 7,03
Sources: China Southern Yearly Reports 1994-2012
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3.2.2.4.3.3 Financial Development Analysis
Financial statistics for China Southern show that the company only experienced
negative operating profits twice in the last two decades (1993-2011). This was 2005
with an operating profit of -160 million USD and, more important in the year mostly
affected by the World Financial Crisis 2008 when China Southern nearly had an
operation profit of minus one billion USD (-944 million). The company made an
average operation profit of 133 million USD during the past 19 years, resulting in an
average operation ratio of 94,4% with the best results in the years 1993, 1997, 1999
and 2002 with ratios below 90%.
3.2.2.4.3.4 Operational Development Analysis
The airline experienced high growth rates in terms of passengers and fleet size.
China Southern carried around 6,5 million passengers in 1993. This number
increased to more than 80 million in 2011. In terms of ASM, this is an increase from
5,9 million to 93,6 million ASM’s in 2011 – nearly 16 times as much as 1993,
operated with a fleet being more than six times bigger in 2011. Sporting load factors
of more than 70% between the years 1993 and 1996, this factor decreased from
1997 to 2003 to under 70%, the worst load factor being 58,5% in 1999. The following
years, China Southern managed to increase the load factor and for the first time ever
in 2011 it reached more than 80%. The average factor for the last two decades is
69,6%. In terms of aircraft utilization rates, the company achieved big success – it
more than doubled utilization time from 5,57 hours in 1993 to 11,92 hours in 2010
and reached more than 12 hours in 2011. Combined utilization rate for the past two
decades is 10,1 hours.
3.2.2.4.3.5 Analysis of Key Indicators of Airline Development
During the past 14 years for which yield data is available for China Southern,
a mixed picture is drawn: reaching a yield of more than 10 US-Cent between 1998
and 2002 this figure crashed down to less than 8 US-Cent for 2003 and 2004,
53
probably as the airline with its regional operations profile was extremely negatively
impacted by the SARS crisis. Average yield for the last 14 years of China Southern
operations is 12,11 US-Cent. In terms of cost, China Southern was able to produce
at costs of less than 10 US-Cent per ASM in 12 of the past 19 years. A notably fact
is that for the years where yield dropped, CASM also dropped drastic to costs of less
than 6 Cent per available mile, together with high load factors, resulting in positive
operation profits. Especially though during the past six years, costs have increased
and latest numbers for 2011 show a cost of 14,3 Cent per ASM. The Profitability
Index for China Southern that can be calculated for the years 1998 until 2011 shows
that 1999 was the most profitable year for the company, reaching an index of 0,23.
2008 was the year with the lowest Profitability Index, -2,37, driven by high costs for
producing ASM’s, a lower load factor and a sub-optimal aircraft utilization. The
average Profitability Index for the last 14 years is -0,7. In terms of efficiency as
already shown in the operational data section, Air China was able to improve within
the last two decades although this improvement did not take place continuously.
While the Efficiency Index rose from 1993-1996, it then decreased until 1999 before
it recovered and started rising again. A further dip can be seen during the SARS-
crisis years 2003 and 2004. For the last two decades, Air China reached an average
Efficiency Index of 7,03.
3.2.2.4.4 China Eastern
3.2.2.4.4.1 Introduction to China Eastern
China Eastern is the P.R.C.’s third largest airline. The Full Service Airline is operating
international, domestic and regional routes and its main hubs are Shanghai Pu Dong
Airport as well as Shanghai Hongqiao Airport. Its average stage length for the last
two decades was 804 miles. This number was slightly lower in 1993 (696 miles) and
increased up to 814 miles in 2011.
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3.2.2.4.4.2 Statistic Data for China Eastern
Table 5: Statistical Data for China Eastern, 1993-2011
Financial Data 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
Passenger Revenue 790 970 1.044 1.158 1.213
Total Revenue 711 717 826 878 10.301 987 1.227 1.355 1.468 1.607
Operating Profit 107 220 138 173 76 49 112 135 136 129
Operating Ratio 85,0% 69,4% 83,3% 80,3% 92,6% 95,0% 90,9% 90,0% 90,8% 92,0%
Net Income after Taxes 115 52 41 73 76 -64 18 21 66 25
Yield - ¢ per RPM 11,87¢ 12,00¢ 12,14¢ 11,95¢ 10,61¢
Cost - ¢ per ASM 11,65¢ 8,52¢ 10,04¢ 8,98¢ 10,06¢ 8,29¢ 8,13¢ 8,85¢ 8,45¢ 8,39¢
Operating Data
RPMs (mil.) 3.830 4.037 4.767 5.154 6.106 6.659 8.085 8.603 9.689 11.437
ASMs (mil.) 5.183 5.838 6.855 7.845 9.481 11.309 13.717 13.786 15.769 17.639
Load Factor 73,9% 69,1% 69,5% 65,7% 64,4% 58,9% 58,9% 62,4% 61,4% 64,8%
Passengers (000) 5.116 5.303 6.240 6.286 6.834 7.401 8.467 9.000 10.206 11.907
Flight Stage (miles) 696 709 696 741 816 850 903 903 832 838
Number of Aircraft 42 39 39 42 47 59 57 60 68 82
Average Seats / Aircraft 168 178 187 199 203 203 194 195 176 175
Utilization (hours/day) 6,09 5,21 6,03 6,72 7,03 7 8,04 7,98 9,27 8,8
Profitability Index -1,30 -1,06 -1,27 -1,11 -1,51
Efficiency Index 4,50 3,60 4,19 4,42 4,53 4,12 4,74 4,98 5,69 5,70
Financial Data 2003 2004 2005 2006 2007 2008 2009 2010 2011 Ø past
19y
Passenger Revenue 1.232 1.856 2.549 3.825 4.638 4.941 4.801 8.724 10.612
Total Revenue 1.728 2.542 3.357 4.761 5.608 6.028 5.831 11.016 12.943
Operating Profit 24 179 -16 -356 17 -2178 -161 843 647 14
Operating Ratio 98,6% 93,0% 100,5% 107,5% 99,9% 136,1% 102,8% 92,3% 95,0% 94,5%
Net Income after Taxes -115 62 -57 -434 50 -2.205 25 779 710
Yield - ¢ per RPM 10,85¢ 10,25¢ 9,75¢ 12,24¢ 13,18¢ 14,79¢ 10,25¢ 15,08¢ 16,92¢ 12,28¢
Cost - ¢ per ASM 9,09¢ 8,68¢ 8,91¢ 11,68¢ 11,72¢ 17,39¢ 9,22¢ 13,73¢ 15,47¢ 10,38¢
Operating Data
RPMs (mil.) 11.352 17.142 22.611 31.226 35.538 33.409 46.836 57.836 62.707
ASMs (mil.) 18.735 25.854 32.584 43.771 48.299 47.184 64.972 74.111 79.485
Load Factor 60,6% 66,3% 69,4% 71,3% 73,6% 70,8% 72,1% 78,0% 78,9% 67,9%
Passengers (000) 12.200 17.711 24.290 35.015 39.159 37.216 54.760 64.879 68.724
Flight Stage (miles) 835 844 826 821 795 794 764 790 814 804
Number of Aircraft 116 139 166 196 213 231 252 330 306
Average Seats / Aircraft 177 167 166 162 163 163 16 164 162 169
Utilization (hours/day) 7,20 8,41 9,93 10,27 10,01 9,22 9,35 10,60 10,50 8,30
Profitability Index -2,51 -1,88 -2,14 -2,95 -2,02 -6,92 -1,83 -1,97 -2,12 -2,19
Efficiency Index 4,36 5,58 6,89 7,32 7,37 6,53 6,74 8,27 8,28 5,67
Sources: China Eastern Yearly Reports 1994-2012
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3.2.2.4.4.3 Financial Development Analysis
China Eastern did experience four years within the last 19 years for which statistical
data is available were it did not achieve positive operating profits. The worst result
is found in 2008, probably a result of the World Financial Crisis, were statistics show
an operating profit of more than minus two billion USD. Other than that, the company
experienced negative operating profits in 2005, 2006 and 2009 but not as high as in
2008. The average yearly operating profit for the last two decades was only 14
million dollars. Best operation ratio was achieved in 1994 with 69,4% but such a
good result has never happened again. This results in an average operating ratio of
94,5% for the time span between 1993 and 2011.
3.2.2.4.4.4 Operational Development Analysis
China Eastern experienced high growth rates in terms of passengers and fleet size.
The company carried around 5,1 million passengers in 1993. This number increased
to more than 68 million in 2011. In terms of ASM, this is an increase from 5,2 million
to 79,5 million ASM’s in 2011 – more than 15 times as much as 1993, operated with
a fleet being more than seven times bigger in 2011 than it was 19 years ago. Two
decades ago, China eastern had a load factor of more than 73% - but this number
declined the following years down to 58,9% in 1998 and 1999 before it recovered
and has continuously risen to more than 78% in 2011. The average factor for the last
two decades is 67,9%. In terms of aircraft utilization rates, the company developed
positively during the past two decades to use its fleet more efficient. A utilization time
between 5 and 6 hours was recorded for 1993 and the following two years but then
increased to more than 10 hours that can be found in the years 2006, 2007, 2010 as
well as 2011. A drop in utilization time is noted for 2003. Combined utilization rate
for the past two decades is 8,3 hours.
3.2.2.4.4.5 Analysis of Key Indicators of Airline Development
During the past 14 years for which yield data is available for China Eastern, this
number has changed often. Relative constant yields around 12 US-Cents can be
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found for the period 1998 until 2001 before declining slightly. Beginning from 2006
onwards, yields increased with a sudden breakdown in 2009 but recovered quickly
afterwards up to nearly 17 cents in 2011. Average yield figures for the 14 years of
China Eastern operations between 1998 and 2011 is 12,28 US-Cent. In terms of
cost, China Eastern was able to produce at costs of less than 10 US-Cent per ASM
in 10 of the past 19 years. Particular high CASM figures are found for 2008.
Especially during the past two years (2010 and 2011), cost have increased and latest
numbers for 2011 show a cost of 15,5 Cent per ASM. The Profitability Index for China
Eastern, based on statistics available, can be calculated for the time span between
1998 and 2011. The average Profitability Index for the last 14 years is -2,19.
According to this Index, the most profitable years of China Eastern was the time
span around 2000 with Indexes between -1,06 and -1,51. The most unprofitable year
was 2008 with a Profitability Index that is -6,92. In terms of efficiency the Efficiency
Index relatively stagnated for a long time between 1993 and 2000, only reaching
scores of less than 5. A particular inefficient use of the company’s aircraft has taken
place in 1994, the Index score is only 3,6 for this year. While it increased from 2001,
a further dip is found for the SARS-crisis year 2003. The first time, China Eastern’s
Efficiency Index reaches more than 8 was the year 2010 as well as 2011. For the
last two decades, China Eastern reached an average Efficiency Index of 5,67.
3.2.2.4.5 Findings in Regard to Chinese Airlines
It becomes clear that all three carriers in focus were able to increase their passenger
numbers enormously in the past two decades by multiplication factors between 13
and 16. In this regard, all three have developed very similar. Growth factors like GDP,
population growth and an increased middle class have benefitted to this
development. By contrast one can distinguish that the airline industry growth factors
regarding alternative transportation, level of competition and government regulations
have had negative impacts for the growth of the Chinese airline industry and it can
be expected that the growth of the airline industry would have even been bigger
without these negative impacts.
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On an average basis, all “Big Three” have operated profitable for the time span of
the past two decades, however – differences can be found. The operating ratio of
Air China is slightly better (less than 3% points) than those of China Southern and
China Eastern that can be seen equal (94,4% vs. 94,5%). Though, China Eastern
recorded a yearly average operation profit of only 14 million USD for the last 19 years
whereas China Southern’s average figure is 133 million USD. Air China’s average
yearly operation profit between 1993 and 2011 is even higher: 329 million USD.
China Southern’s 1999 Efficiency Index of only 5,80 shows a relatively inefficient use
of resources although this was a highly successful year with an operation ratio of 86%
and the company’s best Profitability Index of the last two decades. This fact shows
that Profitability and Efficiency do not necessary depend on each other though one
can assume that a high Efficiency Index generally contributes in reaching a higher
Profitability Index. On an average basis, Air China was the most profitable of the “big
three”, followed by China Southern though China Southern’s efficiency was higher
than that of Air China. China Eastern ranks last for both Indexes.
Even though airport statistics are only available from 2000 onwards it can be
distinguished that Chinese airlines were able to develop at similar growth rates than
the passenger numbers of the airports.
3.2.2.5 Aircraft Manufacturers and China
Both Airbus and Boeing are extremely interested in gaining high shares of the
Chinese aircraft market, as it certainly harbours one of the worldwide highest
potentials for selling thousands of new aircraft within the next years. Currently,
Airbus is doing slightly better.
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Table 6: Aircraft in operation and aircraft orders for Chinese airlines
Aircraft in Operation Aircraft Orders
Airbus Boeing Airbus Boeing
1 China Southern 250 187 33 30
2 China Eastern 253 93 43 77
3 Air China 153 160 5 63
Sources: (The Boeing Company 2014) and (Airbus 2014)
Looking at the orders of the three most important airlines in China, it becomes
evident that they all plan to grow further as they have ordered more than 250 new
airplanes while their airplanes currently in operation are not that old that they would
need to be replaced already.
3.2.3 Case Study 2: Japan
3.2.3.1 Introduction to Japan as one of the World’s Strongest Economies
Japan is, besides the United States, Germany and France, known as one of the
strongest “classic” economies of the world and has already had an extremely well
developed aviation industry, both in terms of airlines and airport infrastructure, for
some decades. Japanese airlines compete with the extremely dense and efficient
network of high-speed-trains throughout nearly the entire country. Japan's strongest-
ever earthquake in 2011 and the following tsunami, devastated the northeast part of
Honshu island. The catastrophe hobbled the country's economy and its
infrastructure.
3.2.3.2 Development of Airline Industry Growth Factors in Japan
3.2.3.2.1 Economic Growth Development in Japan
Japan, as an already developed country, does not have GDP growth numbers similar
to those of China or other developing countries. GDP growth was very low in the
years after 1993, sometimes even negative. The country experienced an average
59
yearly GDP growth of only 1% until 2008 with some years even showing a negative
growth. E.g. 2008 and 2009 show negative growth numbers. 2009 is particular
interesting as GDP growth was -5,5% then as Japan suffered very much from the
World Economic Crisis. The year after, Japan’s economy recovered and reached a
GDP growth of 4,7% which is the highest seen in the past 20 years. Due to the
Fukushima accident, the growth number for 2011 was negative again: -0,57%. Latest
data available is from 2012 and shows a small growth of 2%. In terms of GDP per
capita based on purchasing power parity in current international dollar, more
development can be determined for the past 20 years in Japan. While this number
stood at 22.158 in 1993, it has – except for 2009 where it dropped – continuously
risen to 35.618, an increase of more than 50%. This development benefits the airline
industry as people have more money to spend and are better able to afford flying.
As the GDP growth factor was very low, overall economic development cannot be
regarded as having had a positive nor a negative influence to the development of
the Japanese airline industry.
3.2.3.2.2 Population Development and Urban Population in Japan
Japan’s development in terms of total population is very low. In 1993, 124,5 million
people were living in Japan. This number has risen to around 127 million in 2001
and from then onwards stagnated between 127 and 128 million people. Therefore
the total number of population will not benefit to the airline industry. Two decades
ago in 1993, 96,8 million people in Japan were living in urban areas. This number
has increased to 117 million by 2012, meaning that then nearly 92% of the Japanese
population were living in urban areas which can be seen as benefitting to the
development of the airline industry.
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3.2.3.2.3 Development of Competition in the Japanese Airline Industry
Until recently there has been only a medium competition on the Japanese airline
market with two large Full Service Carriers operating. With the entering of LCC’s into
the market, this has changed to high competition levels.
3.2.3.2.4 Development of Alternative Transportation in Japan
Japan has an extensive network of railways and roads, covering the entire country.
Even though its network’s quality has further improved, especially through the
opening of new high-speed railway lines, there was not much development in terms
of size of both, the rail network (20.252 km in 1993 vs. 20.140 km in 2012), and the
road network in the past two decades. Shinkansen railway, known around the world
for being Japan’s high-speed-train, is for vital importance of the country as it
significantly cuts the time spent moving from region to region. As it often offers
extremely fast city center to city center links it can be seen as a serious threat for the
airline industry. Its network has been extended extensively within the last two
decades, however railway statistics for Japan show that the number of railway
passengers carried, measured by million passenger kilometers, has declined slightly
within the last 20 years from 250.000 in 1993 to around 244.600 in 2012.
3.2.3.2.5 Development of Government Regulations in Japan
The Japanese Ministry of Land, Infrastructure and Tourism is responsible for
improving the functionalities of the airports “as an impetus to the nation’s economic
growth to bolster Japan’s international competitiveness in both arenas of business
and tourism“. (Japanese Ministry of Land, Infrastructure, Transport and Tourism
2012)
Japan’s government passed a new Civil Aeronautics Law in 1999. This law
liberalized the licensing system for airline operations in the country and eased the
foundation of airlines substantially. The fare approval system and other regulatory
provisions also experienced liberalization then. (Zhang, et al. 2008)
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Beginning in 2007, the Ministry began pursuing the goal of an Open Sky, with
exception for metropolitan areas and its limited airport capacities which cannot be
seen as a real deregulation, more as an opening of regional airports. Anyhow, this
changed in late 2012 when Tokyo Haneda Airport was opened for international traffic
and brought a significant increase in airport capacity to the Tokyo metropolitan area.
At this time, Open Sky was expanded to metropolitan airports and Open-Sky
agreements were reached with a total of 23 countries, including the United States &
Canada, most countries of North- and South-East Asia as well as a couple of
countries in Europe and Oceania. This means that in air traffic between Japan and
those countries there is an Open Sky agreement with no limits regarding destinations,
capacity and frequencies. Furthermore, Japan still has its traditional bilateral
agreements regarding air transport with more than 30 other countries that yet are
not part of the Open Sky agreement. 2012 was also the year when the Japanese
cabinet decided to encourage and facilitate the entry of Low Cost Carriers into the
Japanese airline market as a part of its “Comprehensive Strategy for the Rebirth of
Japan”, hoping that the entry of LCC especially create a new demand for air transport
by new foreign tourists that the government of Japan would like to visit their country.
The long term vision of the government is to “elevate the underlying demand for
aviation by stimulating new demand to expand the presence of LCCs in domestic
and foreign air travellers’ transportation to equal the U.S. and Europe (about 20 to
30%) by 2020.” In particular, two important measures have been taken to facilitate
the entry of LCCs in Japan: easement of daily airline operations regulations,
especially those that are relevant for the Low Cost Carrier business, such as
permitting refuelling with passengers on board and the development of LCC
terminals that can make possible the fast turnaround times that LCCs look for and
provide cheaper handling costs than existing terminals. (Ministry of Land,
Infrastructure, Transport and Tourism 2012)
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3.2.3.2.6 Development of Tourism in Japan
International tourism arrival and departures numbers for Japan are available for the
time span between 1995 and 2012. In 1995, 3,3 million people from abroad were
visiting the country and this number has increased to 8,3 million visitors in 2012. This
increase has taken place quite constantly with the exception of two drops that have
taken place in 2009 and 2011. Both drops saw a loss of around 1,5 million visitors
compared to the respective previous year. The reason for the 2009 drop can be seen
in the effects of the World Financial Crisis, the 2011 drop was caused by the
earthquake that took place in East Japan in March 2011. In regard to Japanese
people travelling international, 1995 statistics show 15,3 million travellers. The
number of travellers increased as well but not as intensively as the tourism arrivals
to Japan. 2012 figures show 18,5 million departing tourists. Setbacks can be found
in the development of these statistics as well: The first in 1998, after the Asian
Financial Crisis took place, the second in 2001 as result of September 11 in the
United States where a lot of Japanese people go for their holidays. Furthermore
2008 and 2009 numbers a lower than those of the previous years as the World
Financial Crisis impacted travelling. By contrast to incoming tourists, the 2011
earthquake had no negative consequences for the development of outgoing tourists.
3.2.3.3 Japanese Airports
As of the latest numbers available, there are a total of 142 airports with paved
runways in Japan. (Central Intelligence Agency 2013j)
Table 7: Passenger and Cargo development of Japan's 10 biggest airports between 2003 and 2010
Airport Passengers in Mio. Cargo in Mio. Tons
2003 2010 Change 2003 2010 Change
1 Tokyo Haneda 62.9 64.2 +2% 0.72 0.82 +12%
2 Tokyo Narita Intl. 26.5 30.8 +16% 2.15 2.17 +1%
3 Sapporo New Chitose 18.5 16.7 -8% 0.26 0.23 -13%
4 Fukuoka 18.8 16.3 -15% 0.27 0.26 -4%
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5 Osaka Intl. 18.8 14.8 -27% 0.17 0.14 -21%
6 Naha 12.5 14.5 +14% 0.22 0.39 +44%
7 Osaka Kansai Intl. 13.1 14.2 +8% 0.79 0.76 -4%
8 Nagoya Chubu Centrair 9.8 9.2 -7% 0.17 0.16 -6%
9 Kagoshima 6.2 5.0 -24% 0.05 0.04 -25%
10 Kumamoto 3.1 2.9 -7% 0.03 0.03
Source: (Japanese Ministry of Land, Infrastructure, Transport and Tourism 2012)
One can see both, growth and decline, but there is no clear trend. Therefore,
a look at the numbers of all airports in Japan is warranted to get a better image of
how passenger and cargo numbers changed between 2003 and 2010 which is the
longest time span, were statistics are available. As data is only available for the 50
largest Japanese airports, the total number of passengers and freight between 2003
and 2010 at the 50 biggest airports will be used as a basis for the comparison of total
airport grow:
Table 8: Total Passenger and Cargo development of Japan's airports between 2003 and 2010
Passengers in Mio. Cargo in Mio. Tons
2003 2010 Change 2003 2010 Change
237,8 231,5 -2,6% 4,2 5,1 +21,4%
Sources: (Japanese Ministry of Land, Infrastructure, Transport and Tourism 2012)
Although passenger numbers dropped slightly, Japan’s airports were able to
increase their cargo freight by more than 20%. To prepare the country’s airports for
the aspired emergence and growth of the Low Cost Carrier aviation sector, Japan’s
first LCC terminal was opened at Osaka’s Kansai International Airport in October
2012 whereas at Tokyo Narita International Airport, interim LCC reception facilities
were constructed and opened in the same year before a dedicated LCC terminal will
be opened in 2014. Furthermore, an interim LCC terminal was opened at Naha
Airport, a regional airport, in the same year. (Ministry of Land, Infrastructure,
Transport and Tourism 2012)
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This development shows, that only months after the decision of the Japanese
Government to support the development of the LCC aviation sector, already three of
the country’s ten biggest airports had – even though partly only temporary solutions
– dedicated Low Cost Carrier Terminals.
3.2.3.4 Airlines in Japan
3.2.3.4.1 Introduction to Japan’s Airlines
The two most important and biggest carriers in Japan are All Nippon Airways and
Japan Airlines. The country’s second largest airline today, Japan Airlines, went
bankrupt in 2010 and was then successfully restructuring while continuing
operations. Both Full Service Carriers will be analysed in the following.
3.2.3.4.2 Japan Airlines
3.2.3.4.2.1 Introduction to Japan Airlines
Japan Airlines in 2001 had a 65% share of domestic passengers. (Japan Airlines
2002)
By 2009 the domestic share had risen to nearly 80%, which means that the –
normally significantly more profitable - international passenger proportion and
absolute numbers dropped and only the number of domestic passengers had risen.
(Japan Airlines 2009)
The average stage length of Japan airlines has changed within the past year,
as indicated above. Between the years 1993 and 2002, it was around 1500 miles
but has decreased to an average of only 1000 for the time from 2003 onwards until
2012. Japan’s flag carrier has its main hubs at Tokyo’s airports.
3.2.3.4.2.2 Statistical Data for Japan Airlines
Table 9: Statistical data for Japan Airlines, 1993-2012
65
financial year ending 3/31
Financial Data 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Passenger Revenue 6.764 7.820 8.677 8.090 7.284 6.562 7.596 8.253 7.300 7.756
Total Revenue 8.183 9.473 10.883 10.225 9.320 8.464 9.888 10.660 9.583 13.120
Expenses 8.456 9.572 10.724 10.183 9.069 8.271 9.628 10.155 9.686 13.055
Operating Profit -273 -100 159 41 251 193 260 505 -103 65
Operating Ratio 103,3% 101,1% 98,5% 99,6% 97,3% 97,7% 97,4% 95,3% 101,1% 99,5%
Net Income after Taxes 237 -12 5 -84 -764 204 6 260 -316 73
Yield - ¢ per RPM 19,93¢ 19,99¢ 20,01¢ 17,17¢ 15,60¢ 13,40¢ 14,74¢ 14,93¢ 14,38¢ 15,00¢
Cost - ¢ per ASM 16,23¢ 16,86¢ 16,83¢ 15,10¢ 13,76¢ 11,58¢ 13,16¢ 13,43¢ 13,12¢ 17,96¢
Operating Data 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
RPMs (mil.) 33.937 39.108 43.357 47.124 46.700 48.974 51.515 55.296 50.767 51.697
ASMs (mil.) 52.091 56.766 63.730 67.423 65.928 71.447 73.158 75.640 73.821 72.708
Load Factor 65,2% 68,9% 68,0% 69,9% 70,8% 68,5% 70,4% 73,1% 68,8% 71,1%
Passengers (000) 24.025 26.085 28.846 29.979 31.772 31.362 32.933 33.857 32.472 33.526
Flight Stage (miles) 1.489 1.502 1.443 1.454 1.397 1.495 1.513 1.555 1.515 1.473
Number of Aircraft 114 119 124 128 136 139 139 139 134 133
Average Seats / Aircraft 323 326 328 331 327 323 321 323 326 323
Utilization (hours/day) 9,03 9,35 10,06 10,19 10,12 10,12 10,25 10,48 10,38 10,63
Profitability
Index -3,24 -3,09 -3,22 -3,10 -2,71 -2,40 -2,78 -2,51 -3,23 -7,29
Efficiency Index 5,89 6,44 6,84 7,12 7,16 6,93 7,22 7,66 7,14 7,56
Financial Data 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Ø past 20y
Passenger Revenue 10.866 12.564 11.899 12.000 12.608 13.670 11.461 11.400 10.984 10.712
Total Revenue 17.189 19.841 19.346 19.732 19.641 19.453 16.421 16.011 15.276 14.878
Expenses 17.790 19.318 19.582 19.536 18.848 19.960 18.163 13.795 12.678 12.534
Operating Profit -601 523 -236 196 793 -507 -1742 2216 2598 2344 375
Operating Ratio 103,5% 97,4% 101,2% 99,0% 96,0% 102,6% 110,6% 86,2% 83,0% 84,2% 97,0%
Net Income after Taxes -789 280 -416 -139 149 -630 -2.558 2.216 2.366 2.061
Yield - ¢ per RPM 19,61¢ 21,33¢ 20,29¢ 21,62¢ 23,84¢ 27,18¢ 25,36¢ 29,01¢ 39,85¢ 36,41¢ 21,48¢
Cost - ¢ per ASM 20,66¢ 21,91¢ 22,44¢ 24,36¢ 24,56¢ 26,28¢ 26,19¢ 24,52¢ 30,50¢ 30,45¢ 19,99¢
Operating Data 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
RPMs (mil.) 55.396 58.912 58.657 55.499 52.882 50.296 45.192 39.300 27.565 29.423
ASMs (mil.) 86.114 88.186 87.283 80.203 76.752 75.956 69.342 56.265 41.569 41.162
Load Factor 64,3% 66,8% 67,2% 69,2% 68,9% 66,2% 65,2% 69,8% 66,3% 71,5% 68,5%
Passengers (000) 52.841 51.736 50.884 48.911 47.204 46.682 41.826 36.959 24.464 24.121
Flight Stage (miles) 941 986 1.002 984 971 973 946 937 1.078 1.197 1.243
Number of Aircraft 218 217 211 205 207 206 209 172 151 116
Average Seats / Aircraft 301 301 296 289 278 273 268 257 248 253 325
Utilization (hours/day) 11,25 9,34 9,61 9,26 9,31 9,43 8,79 8,17 7,25 8,33 9,57
Profitability Index -8,05 -7,66 -8,80 -9,40 -8,13 -8,29 -9,66 -4,27 -4,08 -4,42 -5,32
Efficiency Index 7,23 6,24 6,46 6,41 6,41 6,24 5,73 5,70 4,81 5,96 6,56
Sources: Japan Airlines Yearly Reports 1994-2012
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3.2.3.4.2.3 Financial Development Analysis
Financial statistics for Japan Airlines show that the company experienced negative
operating profits seven times within the 20 years between 1993 and 2012). Worst
years for the company were 2003, 2008 and 2009 with negative operating results
that all reached more than 500 million USD, 2010 figures even show a higher loss
of more than 1,7 billion USD. Seen on a 20-year average basis, the company was
able to make a profit of 329 million USD yearly but this figure is not really addressing
the actual development of the company. Calculating the average operating profit for
the 17 years from 1993 until 2009, a number of -34 million USD is found. The high
20-year figure is only reached as the company recorded extremely high operating
profits for the years following the bankruptcy and its restructuring in 2010, 2011 and
2012. Each of this years showed an operating profit of more than 2,2 billion USD
and operating ratios of ranging around 85%. The company achieved an average
operation ratio of 97,7% for the past 20 years (operating ratio for the 17 years of pre-
bankruptcy time is 100,1%. Most successful years of Japan Airlines were –as
already mentioned – the years following the bankruptcy and the company’s
successful restructuring.
3.2.3.4.2.4 Operational Development Analysis
The airline experienced high growth rates in terms of passengers and fleet size from
1993 until 2000. Japan airlines carried around 24 million passengers in 1993. This
number increased to nearly 34 million passengers in 2000. In terms of ASM, this is
an increase from 52 million ASM’s in 1993 to more than 75 million ASM’s in 2000 –
an increase of slightly below 50%. During this time, the airline’s fleet grew less than
25% with the average number of seats per plane being equal. This development
indicates that Japan Airlines could increase its load factor within the time span from
1993 to 2000 and load factor figures proof: 65% in 1993 and 73% in 2000. Between
2000 and 2009 then, Japan Airlines experienced unstable times with first dropping
numbers of passengers and load factors. ASM’s went up for the years 2003 until
2005 shortly while load factors were only ranging about 66%. Until then until the
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company went bankrupt in 2009/2010, ASM’s and passenger numbers went down
continuously while the fleet nearly maintained the same: from 211 planes in 2005
down a maximum of six planes and reaching 209 planes in 2009 resulting in load
factors below 69 percent and a lower utilization time than the 11 years before. The
average factor for the last two decades is 68,5%. When comparing the average load
factors of pre-bankruptcy Japan Airlines (for the 17 years between 1993 and 2009)
with those of the “new” company (2010-2012) in terms of aircraft utilization rates,
they are only differing by one percent-point. Within the restructured company, the
fleet of aircraft was significantly cut to only 116 planes in 2012. Although load-factors
as just as explained nearly kept pre-restructuring levels and utilization times even
further decreased to a three-year average of 7,9 hours (“old” Japan Airlines used its
fleet a combined 17-year average of 9,9 hours) the company achieved big success
as will be explained in more detail in the next chapter, analysing the company’s key
indicators. Combined utilization rate for the past two decades is 9,6 hours.
3.2.3.4.2.5 Analysis of Key Indicators of Airline Development
During the past 20 years for which yield data is available for Japan Airlines, a wave-
picture can be drawn: reaching a yield of ranging around 20 US-Cents from 1993
until 1996, a decrease then started: down to around 15 Cents for 1999-2002 before
increasing again to levels slightly higher than 1993 until 1996 in the years 2003-2006.
2007 until 2009 saw a further increase to higher levels though 2008 had higher yields
than its neighbouring years. Within the “new” Japan Airlines, yield numbers went up
quickly to 29 Cent in 2010. 39,8 Cent of Yield were reached in 2011, 2012 numbers
show 36,4 Cent. Average yield for the past 20 years of Japan Airlines operations is
21,5 US-Cent. Differentiating between the average 17-year yield prior to
restructuring (19 Cent) and the restructuring and post-restructuring phase (35 Cent),
big differences can be distinguished. In terms of cost, Japan Airlines was able to
produce at costs of less than 10 US-Cent per ASM in none of the past 20 years.
Back in 1993, Japan Airlines produced at a cost of 16,2 Cent per ASM. Being stable
for the next two years, Japan Airlines achieved a lower CASM in the following years
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– it was not higher than 14 Cents until 2001 but then continuously increased from
2002 (CASM of 18 Cent) onwards to as high as 26,2 Cent in 2009. During the phase
of restructuring, costs slightly decreased to 24,5 Cents for 2010 but then increased
to 30,5 Cents for 2011 and 2012. The development of CASM and yield for Japan
Airlines indicated that the company, though it was not able to lower its cost achieved
high yields and therefore was as profitable as it was shown before. As a reason for
this can be named that the company focused on profitable, high yield routes. The
twenty-year average CASM for Japan Airlines stands at 20 Cents, pre-restructuring
17-year CASM at 18,5 Cent and the average post-bankruptcy CASM for the three
years of “new” Japan Airlines operation 28,5 Cent. The Profitability Index for Japan
Airlines can be expected very low as the company suffered heavy operating profit
losses and went into bankruptcy. While the years from 1993 until 2001 show low, but
not extreme low Profitability Indexes of around -3, the Index then dropped suddenly
to figures between -7,3 and -9,4 in the years 2002-2008. 2009 was the year with the
lowest Profitability Index, -9,66. This year, as well as previous years were driven by
high costs for producing ASM’s and yields that were too low to have the chance of
operating profitable. The average Profitability Index for the 17 years between 1993
and 2009 is -5,5, for the time 2010-2012 this number estimates -4,3 and for the past
two decades 5,4. In terms of efficiency as already shown in the operational data
section, Japan Airlines was able to reach Efficiency Indexes of more than 7 only for
seven of the last 20 years – all of those to be found at operating times of the “old”
Japan Airlines. The Index numbers for the restructured company (2010: 5,7; 2011:
4,81 and 2012: 5,96) are even worse than the 20-year average of Japan Airlines:
6,6.
3.2.3.4.3 All Nippon Airways
3.2.3.4.3.1 Introduction to All Nippon Airways
All Nippon Airways is Japan’s largest airline. It has its main hubs at the Airports of
Tokyo. The average stage length of the airline lies at little more than 700 miles and
69
has not changed much during the past two decades. This stage length is indicating
a focus on domestic and regional operations.
3.2.3.4.3.2 Statistical Data for All Nippon Airways
Table 10: Statistical data for All Nippon Airways, 1993-2012
financial year ending 3/31
Financial Data 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Passenger Revenue 6.475 7.122 7.575 6.730 6.298 5.884 7.532 7.939 6.556 6.246
Total Revenue 6.951 7.689 8.293 7.401 7.381 7.017 10.859 11.545 9.621 10.133
Expenses 6.795 7.526 8.010 7.242 7.375 7.120 10.576 10.803 9.438 10.154
Operating Profit 155 163 282 159 5 -102 283 742 184 -22
Operating Ratio 97,8% 97,9% 96,6% 97,9% 99,9% 101,5% 97,4% 93,6% 98,1% 100,2%
Net Income after Taxes 21 43 32 35 -22 -51 -137 364 -57 -235
Yield - ¢ per RPM 28,29¢ 29,75¢ 28,45¢ 23,04¢ 19,79¢ 17,63¢ 21,37¢ 22,01¢ 19,77¢ 18,54¢
Cost - ¢ per ASM 18,47¢ 19,77¢ 19,16¢ 16,11¢ 15,07¢ 13,60¢ 19,51¢ 20,15¢ 18,53¢ 20,36¢
Operating Data 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
RPMs (mil.) 22.886 23.937 26.629 29.215 31.827 33.377 35.248 36.067 33.162 33.692
ASMs (mil.) 36.797 38.072 41.803 44.958 48.938 52.338 54.197 53.621 50.932 49.866
Load Factor 62,2% 62,9% 63,7% 65,0% 65,0% 63,8% 65,0% 67,3% 65,1% 67,6%
Passengers (000) 35.129 33.717 37.822 39.377 40.697 41.471 42.743 43.460 43.045 43.680
Flight Stage (miles) 651 658 681 707 739 762 782 785 764 739
Number of Aircraft 111 114 119 123 130 137 137 140 137 138
Average Seats / Aircraft 331,2 331,6 318,6 318,9 316,3 315,9 323,2 319,9 316,1 317
Utilization (hours/day) 7,18 7,26 7,93 8,16 8,47 8,05 8,37 8,2 7,91 7,83
Profitability Index -0,87 -1,05 -1,04 -1,13 -2,21 -2,36 -5,62 -5,33 -5,66 -7,83
Efficiency
Index 4,47 4,57 5,05 5,30 5,51 5,14 5,44 5,52 5,15 5,29
70
Financial Data 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Ø past 20y
Passenger Revenue 7.313 8.100 8.042 8.700 9.100 8.500 8.000 10.973 12.320 12.182
Total Revenue 10.834 12.043 12.040 12.763 13.102 12.398 11.551 14.324 16.009 15.895
Expenses 10.528 11.319 11.259 11.973 12.359 12.406 12.210 13.613 14.887 14.765
Operating Profit 306 725 781 790 743 -7 -659 711 1122 1130 185
Operating Ratio 97,2% 94,0% 93,5% 93,8% 94,3% 100,1% 105,7% 95,0% 93,0% 92,9% 98,1%
Net Income after Taxes 220 251 235 279 565 -18 -208 274 357 518
Yield - ¢ per RPM 22,60¢ 23,70¢ 22,94¢ 24,13¢ 24,76¢ 23,93¢ 24,54¢ 31,49¢ 35,12¢ 31,56¢ 24,67¢
Cost - ¢ per ASM 20,84¢ 22,01¢ 21,60¢ 22,63¢ 22,56¢ 22,99¢ 24,24¢ 27,16¢ 27,42¢ 25,76¢ 20,90¢
Operating Data 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
RPMs (mil.) 32.360 34.171 35.050 36.058 36.746 35.522 32.601 34.845 35.078 38.602
ASMs (mil.) 50.517 51.419 52.130 52.917 54.792 53.949 50.368 50.121 54.291 57.314
Load Factor 64,1% 66,5% 67,2% 68,1% 67,1% 65,8% 64,7% 69,5% 64,6% 67,4% 65,6%
Passengers (000) 43.388 46.450 48.315 49.226 48.987 46.982 41.921 43.585 41.911 44.668
Flight Stage (miles) 712 660 639 639 671 689 692 710 754 770 710
Number of Aircraft 141 141 146 156 162 165 169 176 178 187
Average Seats / Aircraft 305 272 257 252 247 238 234 228 223 221 284
Utilization (hours/day) 8,21 9,43 10,18 10,07 9,96 9,90 9,19 9,06 9,53 10,01 8,75
Profitability
Index -6,36 -6,25 -6,18 -6,19 -5,94 -7,25 -8,36 -5,27 -4,73 -4,49 -4,71
Efficiency Index 5,26 6,27 6,84 6,86 6,68 6,51 5,95 6,30 6,16 6,75 5,75
Sources: All Nippon Airways Yearly Reports 1994-2012
3.2.3.4.3.3 Financial Development Analysis
All Nippon Airways did experience four years within the last 20 years for which
statistical data is available were it did not achieve positive operating profits. The
worst result is found in 2009, probably a result of the World Financial Crisis, were
statistics show an operating profit of -659 million USD. Other than that, the company
experienced negative operating profits in 1998, 2002 and 2008 but not as high as in
2009. The average yearly operating profit for the last two decades was 375 million
dollars. Best operation ratios were achieved in the years 2004 until 2007 where
operating ratios ranged between 93,5 percent and 94,3 percent. An average
operating ratio of 97% can be calculated for the time span between 1993 and 2012.
3.2.3.4.3.4 Operational Development Analysis
All Nippon Airways experienced medium growth rates in terms of passengers for the
year 1993 until 2006. The company carried around 35,1 million passengers in 1993.
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This number increased to more than 49,2 million in 2006. Fleet size was growing
faster than passenger numbers. The reason for that is to be found in that the average
number of seats per aircraft decreased in the same time from 331 seats per plane
to 252, so more of smaller aircraft were needed instead of buying fewer of the same
size. In terms of ASM, this is an increase from 36,8 million to 49,2 million ASM’s in
2011 – an increase of one third. From 2007 onwards, passenger numbers
transported lowered and the latest four years show passenger numbers between
41,9 million (2009) and 44,7 million in 2012. The development of the company’s load
factors is completely indifferent, ranging between numbers of 62,9% (1993) and the
highest being 69,5% in 2010, resulting in a 20-year-average Load Factor of 65,6%.
In terms of aircraft utilization rates, the company managed to develop positively
during the past two decades to use its fleet more efficient. For a little more than first
decade in focus of this paper, between 1993 and 2003, utilization time was ranging
between 7,2 hours and 8,5. A utilization time between 9,1 and 10,2 hours was
recorded for 2004 onwards until 2012.
3.2.3.4.3.5 Analysis of Key Indicators of Airline Development
Yield data for All Nippon Airways is available for all 20 years that are looked at in this
thesis. Amounts of yields were high in the 1993-1996 time span (between 28,2 Cent
and 29,8 Cents) but afterwards decreased in general numbers as low as 17,6 Cent
in 1998. yields amounting as high as in 1993 until 1996 firstly appeared from 2010
onwards then. The past 20 year average yield is estimated at 24,7 Cents.
In terms of cost, All Nippon Airways was not able to produce at costs of less
than 10 US-Cent per ASM in any of the past 20 years. CASM figures of lower than
20 Cents can be found for the years 1993 until 1999 and 2001. Lowest CASM figures
are recorded for the years 1996 (16,1 Cent), 1997 (15,1 Cent) and 1998 (13,6 Cent).
Beginning in 2002, CASM figures were generally increasing from 20 Cent up to 27,4
Cent in 2011 with 2012 being the first year of a slight decline in CASM: 25,8 Cents.
On an average basis for the last 20 years, the CASM figure is 20,9 Cent. The
Profitability Index for All Nippon Airways, based on statistics available, can be
calculated for the time span between 1993 and 2012. The average Profitability Index
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for the last 20 years is -4,71. According to this index, the most profitable years for
the airline were the four years between 1993 and 1996 with indexes of nearly -1. The
most unprofitable years were the time between 2002 and 2009 with Profitability
Indexes ranging in between 5,9 and as low as -7,83. In terms of efficiency the
Efficiency Index relatively stagnated within the time frame between 1993 and 2003,
reaching only scores between less than 4,5 and 5,5. A little increase in efficiency
was noted then, from 2004 onwards the Index displays numbers between 6,1 and
6,9. This development though is extremely low. For the last two decades, All Nippon
Airways reached an average Efficiency Index of 5,75.
3.2.3.4.4 Findings in Regard to Japanese Airlines
It can be distinguished that All Nippon Airways, by contrast to its opponent Japan
Airlines was able to increase traffic, measured in RPM’s, at least slightly compared
to 20 years ago. Japan Airlines RPM’s numbers increased much but the company
then struggled and went bankrupt now having less traffic than 20 year ago. Growth
factors like GDP, population growth and an increased middle class have were low in
Japan and are reflected by the growth of All Nippon Airways. One can also
distinguish that the airline industry growth factors regarding alternative transportation,
level of competition and government regulations have had negative impacts for the
growth of the Japanese airline industry and it can be expected that the growth of the
airline industry would have even been bigger without these negative impacts.
The average 20 year operating ratio of Japan Airlines is slightly lower (97,7%) those
of All Nippon Airways (97,0%) although it has to be noticed that the operating ratio
of the 17 years of the “old” Japan Airlines was 100,1%.
Japan Airline’s 20-year Efficiency Index of only 6,56 shows a relatively inefficient use
of resources as well as the Index of All Nippon Airways shows a lower number with
only 5,75. In case of Profitability Index of the last two decades, All Nippon Airways –
as it can be expected as the company by contrast to its competitor did not went
bankrupt – performed better with an Profitability Index of -4,71. Index for 20-year
average Japan Airlines was -5,43, the 3-year index for the restructured company
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only -4,26. On an average basis, Air China was the most profitable of the “big three”,
followed by China Southern though China Southern’s efficiency was higher than that
of Air China. China Eastern ranks last for both Indexes.
Even though airport statistics are only available from 2003 until 2010 onwards it can
be distinguished that Japanese airlines develop similar to the passenger numbers of
the airports.
3.2.3.5 Aircraft Manufacturers in Japan
Table 11: Aircraft orders and deliveries for Japanese airlines
Aircraft Delivered Aircraft Orders
Airbus Boeing Airbus Boeing
1 All Nippon Airways 13 175 33 48
2 Japan Airlines 121 31 30
Sources: (The Boeing Company 2014) and (Airbus 2014)
As Japan is today economically deeply linked with the United States, it is not
surprising that Japanese airlines buy most of their planes from Boeing. As most of
the ordered planes have already been delivered, only a medium fleet growth can be
expected within the next years for the country’s two main carriers.
3.3 South-East-Asian Airline Industry Development
3.3.1 Introduction to the Development of South East Asia
The airline industry in South East Asia in the past twenty years can be described as
booming. Airports of the region such as Singapore, Kuala Lumpur and Bangkok
“gained a reputation as international hubs for the industry. Airlines also took
advantage of the rapidly rising demand to record increasing passenger loads,
revenue and profitability with route networks being extended.” (Sadi and Henderson
2000)
74
The emergence of Low Cost Carriers has changed the airline industry in
ASEAN significantly.
3.3.2 Development of Growth Factors Affecting the ASEAN Region
3.3.2.1 Government Regulatory Policies on the Regional Level: Open Sky
in ASEAN
The Association of South-East Asian nations was formed in 1967 by Indonesia,
Malaysia, the Philippines, Singapore and Thailand and continuously enlarged by
Brunei, Vietnam, Laos, Myanmar and Cambodia until 1999. The founding principles
of the organization - today including all South-East Asian countries defined as
belonging to South-East Asia by this paper - are the acceleration of economic growth
amongst others like cultural development and regional stability. The move towards
Open Sky in ASEAN is different from how Open Skies has been implemented in
Europe some time ago. Besides some regional Open Skies arrangements that only
include minimal liberalisation measures, the EU Open Skies is the only comparable
example of a region that has introduced an open sky policy without any limitations.
European Union member countries at this time were forced to implement Open Skies
by a decision of the European Court of Justice. It is doubtful whether European air
liberalization would have come as far as this if it had up to all member countries
negotiating an agreement. Therefore it is even more impressive that ASEAN
members have negotiated agreements that lead to a formation of open skies in the
region as members of ASEAN are diverse countries looking at the population, GDP,
progress of the aviation sector and their current different aviation policies before the
implementation of ASEAN Open Sky, ranging from not existing to being extremely
restrictive up to being very liberal. The Open Sky policy of ASEAN had its beginning
in the 1995 Agenda for Greater Economic Integration that included a plan of action
for transport and communications and appeared a lot of times in declarations and
action plans of the following years like the ASEAN Vision 2020 (1997) and the
Successor Plan of Action in Transport 1999-2004, all aiming at providing a more
competitive environment for the air transport industry through liberalization. The 7th
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Air Transport Meeting of ASEAN then brought more concrete proposals. Transport
Ministers of all ASEAN member countries agreed in launching a regional initiative
working on the liberalization of air services in ASEAN with the aim of supporting a
greater market access and flexibility regarding air services. In terms of cargo freight
operations liberalization, an ASEAN Memorandum of Understanding was signed in
2002 as a first step towards the full liberalization of air freight services within the
Association of South-East Asian Nations. After the ASEAN Air Transport Working
Group then had worked out the so called Road Map for the Integration of ASEAN:
Competitive Air Services Policy that included the various steps and time frames for
deregulating the airline industry of ASEAN, it was approved by the Transport
Ministers in 2003 and a special meeting on ASEAN Open Sky was held in 2004 and
major steps were already done. The action plan for the ASEAN Open Sky included
unlimited (e.g. not limited to capacity of aircraft, frequencies, airports) third and fourth
freedom between any points within ASEAN by June 2010. Third freedom rights mean
the right to carry passengers or cargo from one's own country to another, in this case
another member of ASEAN as the ASEAN Open Sky policy does only consist of
regional liberalization within all members of ASEAN. Routes between ASEAN
members and countries outside the Association of South-East Asian Nations are not
included in this Open Sky agreement and still remain handled on bi-lateral
agreements between the states. The right to carry passengers or cargo back from
another country to one's own is called fourth freedom. Unlimited fifth freedom
between any point within ASEAN will be introduced by 2015 and from this time on
there will not exist any restrictions on pricing and type of airlines as well as there will
be a relaxation on airlines’ ownership and control, removing route capacity controls
and wet lease aircraft (a leasing arrangement where one airline provides an aircraft
including crew, maintenance and insurance to another airline which pays by hours
operated and uses the plane for their services) to be allowed within ASEAN. Fifth
freedom rights allows an airline to carry revenue traffic between foreign countries as
a part of services connecting the airline's own country. Currently not yet part of the
ASEAN Open Sky are so called Seventh Freedom Rights from which especially Low-
Cost-Carrier airlines of the European Open Sky agreement benefitted extremely and
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which can be seen as the basis for their successful development. This gives an
airline the right to operate freely and without limitations within countries of the
agreement, meaning Singapore Airlines could then offer flights between Indonesia
and Thailand without stopping at Singapore. It remains unclear, whether and when
this right will be part of the ASEAN Open Sky. Though Open Sky in ASEAN already
is and will be continue to be an important component of the overall economic
integration of ASEAN as a good system of transport links is critical to for the
development of economies. Open Sky provides fertile conditions under those Low
Cost Carriers can continue to develop or can arise. (Forsyth, King and Rodolfo 2006)
3.3.2.2 The Asian Financial Crisis and its Influences onto the South East
Asian Aviation Industry
South East Asia in the 1990’s was one of the world’s aviation centers, especially in
terms of growth but also in regard to the reputation of some of its airports and airlines.
This changed when a massive economic crisis struck Asia, especially the South East
Asian countries, beginning in July 1997 and led to a massive value-fall of the region’s
currencies. The so called Asian Financial Crisis originated from Thailand and spread
quickly throughout the ASEAN countries and reached North East Asia as well. (Sadi
and Henderson 2000)
Since 1st of July 1997, the Thai Baht has depreciated by 45% against the US-
Dollar, Indonesia’s Rupiah even lost 70% of its value. Both Malaysia and the
Philippines were affected with its currencies loosing around 40% against the US-
Dollar. As Singapore at this time already had stronger macro-economic
fundamentals, it was not as deeply affected as its neighbouring countries: The
Singapore Dollar “only” lost around 20% of its value compared to the USD. (The
Straits Times 1998s)
These conditions followed not only an economic crisis of unprecedented scale
but especially affected the tourism and transportation sectors in South East Asia.
Demand for flights decreased massively as a result of the crisis and in 1998, the
growth of tourist numbers in the ASEAN region was the smallest worldwide. As the
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airline industry is still an industry that is very much interwoven with the US-Dollar,
the currency devaluation had massive effects on the operation of airlines. Fuel costs
for example are usually paid in USD, meaning that the cost for fuel increased
immensely during this time. Airlines in Thailand, Indonesia, the Philippines and
Malaysia suffered most while every airline that operated in these regions and sold
tickets in the currencies of these countries felt the negative impacts. (Sadi and
Henderson 2000)
The Asian Financial Crisis resulted in the cancelling or suspension of air
transport services and the cancellation of aircraft orders as it was unclear how fast
and how far the industry would recover and can be seen as one of the most adverse
happenings for the airline industry in South East Asia.
3.3.3 Low Cost Carrier Emergence and Development in South-East
Asia
The rise of Low Cost Carriers in South-East Asia is a field where the time
span of observation in this paper has to be changed from the past two decades to
the last decade only. The reason is that the emergence of the first Low Cost Carriers
in ASEAN only started about ten years ago. The study “Perspectives on the
Development of Low-cost Airlines in South-east Asia” by Kua and Baum, published
in 2004, finds that at the time of writing, assuming in 2003, there was not a single
low cost airline operating regionally in South-East Asia for various reasons like
national regulations that limit access to international air routes in favour of flag
carriers and a bilateral system of route allocation that was normal at this time. Cebu
Air of the Philippines that can be seen as South-East Asia’s first Low Cost Carrier,
that commenced operations in 1996 even before the emergence of Air Asia took
place. More information regarding the development of Air Asia will be given as part
of the case study for Malaysia. (Baum and Kua 2004)
In the last 10 years, a lot of South East Asian Low Cost Carrier have emerged
and developed.
Just recently, in February 2013, Singapore's Transport Minister Lui Tuck Yew
stated in an interview "LCCs now make up more than 50% of the intra-Southeast
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Asia market, a phenomenal growth from less than 5% just ten years ago. Of the top
15 busiest LCC international routes, nine are found in Southeast Asia. The largest
three LCC international routes in the world originate from Singapore: Singapore-
Jakarta, Singapore-Kuala Lumpur and Singapore-Bangkok. What is more
meaningful in the LCC story is the benefits they have brought. LCCs have brought
air travel to the mass market, a particularly significant point for Asia given the region’s
fast expanding middle class. With their business model, LCCs have also brought air
travel to many secondary points that were previously not viable”. He noted the
continued evolution and transformation of LCCs, including an increased trend of
interlining between LCCs and the establishment of LCC affiliates in different
countries to take advantage of the air rights in those countries. He continued, "To
fully capture the benefits that LCC can bring, governments would need to embrace
the LCC sector and facilitate its growth"; (Centre for Aviation 2014)
Statistics regarding the LCC penetration of the South East Asian market show
that they had single digit market shares between 2001 and 2004. 2005 was the first
year when the LCC capacity share within South East Asia was more than 10%
(13,6%). This trend has continued and the enormous success has inspired airline
entrepreneurs and FSC to establish Low Cost Carriers to participate in this success.
2009 was the year, when LCC’s firstly accounted for more than 30% of South East
Asia’s traffic and this proportion exceeded 50% for the first time in 2012, growing
further to nearly 58% in 2013. Low Cost Carriers in South East Asia do not only fly
regionally, the also operate to and from destinations outside South East Asia, mostly
North East Asia. LCC’s accounted for a 14,6% share in this traffic last year, up from
1,1% in 2005 and 8,6% in 2009. (Centre for Aviation 2013)
3.3.4 Case Study 3: Singapore
3.3.4.1 Introduction to Singapore’s Development
Singapore today is one of the world's most prosperous countries. Singapore is ruled
by the People’s Action Party (PAP), which has dominated Singapore’s politics since
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its independence on 9th August 1965 after peacefully seceding from the Federation
of Malaysia. (Steiner 2011)
Singapore, being an island-state with no natural resources, depends on
tertiary sector businesses. Therefore, the country has a strong interest in air-
transport as all those businesses would not be possible without the airline industry.
3.3.4.2 Development of Airline Industry Growth Factors in Singapore
3.3.4.2.1 Introduction to the Development of Growth Factors in Singapore
In the following decades of authoritarian development, Singapore
transformed into a first-world country, having a higher GDP per Capita than Austria
or Germany today.
Today, Singapore – as one of the four Asian Tigers - has a highly developed
and successful free-market economy. It enjoys a remarkably open and nearly
corruption-free environment, stable prices, and a per capita GDP higher than that of
most developed countries. Singapore is a world leader in several areas: it is the
world's fourth leading financial center, the world's second biggest casino gambling
market, the world's top three oil refining center. Its port of is one of Singapore’s key
economic elements because the country is lacking in land and natural resources. It
is one of the five busiest ports in the world, most notably being the busiest
transhipment port in the world. Singapore has attracted major investments in
pharmaceuticals and medical technology production and will continue efforts to
tighten Singapore as Southeast Asia's financial and high-tech hub. Tourism is also
a part of the economy which gets stronger year by year. (Central Intelligence Agency
2013)
3.3.4.2.2 Economic Development of Singapore
During the past two decades from 1993-2012, Singapore experienced a couple of
years with GDP growth in the speed of double-digit growth, such as 1993, 1994 and
also 2010. By contrast for example, GDP growth was negative in years after major
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events like the Asian Financial Crisis 1997 (-2,17% GDP growth in 1998), the terror
attacks of 9/11/2001 (-1,15%) and the World Financial Crisis beginning in 2008 that
resulted in a negative GDP growth of -0,79% in 2009. Average GDP growth was
slightly more than 6% yearly for the past two decades. GDP per Capita (PPP) grew
by the factor 2,5 during the past two decades from 23.180 Current International
Dollar to 60.800 Current International Dollar in 2012. These developments have
generally had a positive impact as a growth factor for the airline industry of the
country.
3.3.4.2.3 Population Development and Urban Population in Singapore
Singapore’s population increased significantly during the past two decades, mainly
because of people from abroad coming to Singapore. Back in 1993, the population
size was 3,3 million and has risen by 2 million to more than 5,3 million Singaporean’s
in 2012. This means the potential number of customers for the Singaporean aviation
market has increased by more than 60% during the last 20 years. Therefore, positive
impacts on the country’s aviation industry can be expected.
3.3.4.2.4 Development of Competition within Singapore’s Airline Industry
As the Government of Singapore always encouraged competition and a nearly free
aviation industry, competition at Singapore’s airport was already existing before the
entry of LCC’s. The level of competition has increased in the middle of the last
decade when more and more competitors entered the LCC market and competition
started taking place on all levels between FSC and FSC, LCC and LCC as well as
between FSC and LCC. For example, the average fare between Singapore and
Kuala Lumpur, a route that previously only had been served by Singapore Airlines
and Malaysia Airlines, went down to around 30 Singapore dollars when LCC’s
entered the market and started serving the route in after Singapore-Malaysia open
skies was implemented in 2008. (Zhang, et al. 2008)
The level of competition was medium before LCC entered the market and since a
couple of years it can be regarded as high.
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3.3.4.2.5 Development of Alternative Transportation in Singapore
Due to the geography of the country, talking about long-haul transportation is not
possible for the country. Alternative forms of international travel to air-transport from
Singapore only include ferries or road connections with Malaysia – both cannot be
seen as a threat to the Singaporean airline industry.
3.3.4.2.6 Development of Government Regulations
Aviation in Singapore is a key component of the Singaporean economy. The country
follows the strategy being the premier transport hub in the Asian region. Singapore
has followed an open skies policy since the 1960’s. Singapore has Air Services
Agreements with over 90 countries and regions and signed more than 30 Open Sky
Agreements until 2013. “The traffic rights secured for Singapore Airlines under
Singapore’s open skies strategy have been integral to the carrier’s emergence as
one of the world’s largest airlines despite its very small domestic traffic base.”
(Centre for Aviation 2014s)
Singapore has the most liberal aviation policy in Southeast Asia. The Civil
Aviation Authority of Singapore, a division of the Ministry of Transport has the task
to ensure that the country features a vibrant air hub and high standards of civil
aviation. Furthermore the government has a strong interest to attract lots of aviation-
related businesses and activities. Desirable examples include airlines, maintenance,
and repair and overhaul services, aircraft manufacturing and aviation logistics.
Foreign direct investment is encouraged. (Centre for Aviation 2014s)
In addition to that – especially important from 2015 onwards, the importance
and far-reaching impacts of the ASEAN Open Sky policy have already been
explained before. The high regulatory liberalization of the Singaporean airline
industry has benefitted much to the growth of the industry.
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3.3.4.2.7 Development of Tourism in Singapore
Tourism is an area that it heavily supported by the Singaporean Government as it is
seen as one economic key factor and important for the country’s further successful
development. Back in 1995, Singapore welcomed more than 6 million visitors from
abroad while nearly 3 million Singaporean’s travelled internationally (it has to be
noted that this also includes day trips to Malaysia). Tourism arrival numbers fell
slightly the next two years and dropped to 5,1 million in 1998 as the Asian Financial
Crisis was affecting the ASEAN countries.
As The Singapore Tourism Board expects the Asian market contributing
around 70% of visitors to Singapore this crisis can be seen as the explanation for
the sudden drop. (Sadi and Henderson 2000)
However, arrival numbers of international tourists recovered to pre-crisis
levels from 1999 until the next crisis that negatively affected tourism: the outbreak of
SARS. This crisis had an even worse impact that the Asian Financial Crisis on the
development of tourist numbers. In 2003, Singapore only welcomed 4,7 million
visitors. After that, numbers recovered again and increased quickly to more than 7
million in 2005 and nearly 8 million tourists arriving in 2007. The World Financial
Crisis then negatively influenced the development and numbers decreased by half
a million in 2009 compared to 2007. 2010 and 2011 saw quick recovery of tourist
arrivals with 2011 being the first year that brought more than 10 million tourists from
abroad to the country. 2012 numbers reach 11,1 million. By contrast to this
development, one finds that numbers of Singaporean’s going abroad have
developed rather different: These numbers have increased quite continuously
without bigger drops as crisis’ hit the country. The number of departures in
international tourism raised from 2,9 million in 1993 to more than 8 million in 2012.
To conclude it can be said, that Singaporean’s departing for tourism have certainly
had a continuing positive impact to the airline industry whereas numbers of tourists
arriving have not benefitted much to the airline industry development between 1995
and 2003 but can be seen as a growth factor for the airline industry from 2004
onwards.
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3.3.4.3 Airlines in Singapore
3.3.4.3.1 Singapore Airlines
3.3.4.3.1.1 Introduction to Singapore Airlines
Singapore Airlines (SIA) was founded in the year 1972 and has developed from a
regionally operating airline into one of the world’s most famous airlines. It is well
known because of the Singapore Girl, representing the carrier’s aim for hospitality
and exceptional service. One of the main characteristics of SIA is that the airline,
given the size and structure of its home-country has no domestic network – it
depends solely on international flights. Singapore Airlines can be seen as a
distinguished example for a nation’s flag carrier. Primarily decades ago but still until
today to a smaller extent, flag carriers worldwide played “ambassadorial” roles for
the nations they represent. In the case of SIA it is commonly said that it was
Singapore Airlines that first of all introduced Singapore to the world. Until today many
flag carriers are still seen as national prestige and pride symbols. (Chan 2000)
Singapore Airlines group that also includes its 100% subsidiaries Silk Air that
only flies regionally and SIA Cargo is majority owned by the Singapore Government
through a state-owned holding company that supports companies with bright growth
prospects by providing capital and therefore supporting the economic development
of the country, Temasek Holdings. (Forsyth, King and Rodolfo 2006)
Singapore Airlines has a worldwide network with many long-haul flights as its
subsidiary Silk Air operates a lot of regional flights within South East Asia. Therefore
Singapore Airlines had an average stage length of 2.574 miles for the past twenty
years. Singapore Airlines is a Full Service Carrier.
3.3.4.3.1.2 Statistical Data for Singapore Airlines
Table 12: Statistical data for Singapore Airlines, 1993-2012
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fiscal year ending March 31
Financial Data 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Passenger Revenue 2.666 3.030 3.358 3.496 3.370 3.072 3.511 3.841 3.584 3.849
Total Revenue 3.370 3.868 4.407 4.617 4.547 4.195 4.834 5.313 5.313 5.353
Expenses 3.089 3.363 3.886 4.192 4.137 3.959 4.368 4.747 4.796 5.475
Operating Profit 281 505 522 425 411 236 467 566 557 401
Operating Ratio 91,7% 86,9% 88,2% 90,8% 91,0% 94,4% 90,3% 89,3% 86,6% 93,2%
Net Income after Taxes 452 632 622 639 600 483 747 771 358 625
Yield - ¢ per RPM 10,40¢ 10,85¢ 11,16¢ 10,45¢ 9,84¢ 8,56¢ 8,76¢ 8,73¢ 8,38¢ 8,35¢
Cost - ¢ per ASM 8,61¢ 8,60¢ 9,30¢ 9,32¢ 8,71¢ 7,77¢ 8,18¢ 8,28¢ 8,19¢ 9,05¢
Operating Data 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
RPMs (mil.) 25.642 27.930 30.075 33.453 34.236 35.877 40.097 43.991 42.765 46.090
ASMs (mil.) 35.878 39.080 41.775 44.975 47.516 50.953 53.413 57.357 58.537 60.483
Load Factor 71,5% 71,5% 72,0% 74,4% 72,1% 70,4% 75,1% 76,7% 73,1% 76,2%
Passengers (000) 9.305 9.920 10.761 11.838 12.149 12.329 13.545 14.874 14.696 15.337
Flight Stage (miles) 2.092 2.157 2.177 2.197 2.283 2.416 2.466 2.478 2.471 2.555
Number of Aircraft 63 65 68 77 83 93 102 97 95 96
Average Seats / Aircraft 246 256 255 259 257 228 226 229 230 241
Utilization (hours/day) 10,96 11,04 11,78 12,03 11,74 11,34 10,89 11,33 11,24 12,45
Profitability Index -1,17 -0,84 -1,26 -1,55 -1,62 -1,74 -1,60 -1,58 -2,06 -2,69
Efficiency Index 7,84 7,89 8,48 8,95 8,46 7,98 8,18 8,69 8,22 9,49
Financial Data 2004 2005 2006 2007 2008 2009 2010 2011 2012
Ø past
20y
Passenger Revenue 3.477 4.449 4.842 6.237 7.535 7.818 6.064 7.612 8.298
Total Revenue 6.432 7.237 7.201 7.281 8.685 9.056 7.137 8.855 9.664
Expenses 5.845 6.700 6.809 6.622 7.566 8.485 7.164 8.213 9.519
Operating Profit 588 537 392 659 1119 571 -27 642 145 473
Operating Ratio 90,9% 92,6% 94,6% 90,9% 87,1% 93,7% 100,4% 92,7% 98,5% 91,8%
Net Income after Taxes 1.017 848 747 1.366 1.395 737 152 824 269
Yield - ¢ per RPM 8,77¢ 9,29¢ 9,62¢ 11,45¢ 13,34¢ 13,44¢ 11,97¢ 14,43¢ 15,46¢ 10,70¢
Cost - ¢ per ASM 10,62¢ 10,47¢ 10,09¢ 9,51¢ 10,82¢ 11,44¢ 10,77¢ 12,39¢ 13,64¢ 9,78¢
Operating Data 2003 2004 2005 2006 2007 2008 2009 2010 2011
RPMs (mil.) 39.654 47.898 50.325 54.462 56.484 58.178 50.675 52.762 53.688
ASMs (mil.) 55.043 63.973 67.486 69.627 69.954 74.171 66.493 66.282 69.790
Load Factor 72,0% 74,9% 74,6% 78,2% 80,7% 78,4% 76,2% 79,6% 76,9% 75,0%
Passengers (000) 13.124 15.877 16.618 18.022 18.957 19.142 16.322 16.621 16.905
Flight Stage (miles) 2.722 2.764 2.821 2.811 2.831 2.863 2.887 2.949 2.964 2.574
Number of Aircraft 84 89 91 94 94 101 108 110 105
Average Seats / Aircraft 273 273 270 269 266 273 277 272 272 256
Utilization (hours/day) 12,46 15,28 15,71 15,94 15,89 15,82 13,06 12,70 13,73 12,92
Profitability Index -4,30 -3,52 -2,91 -0,55 -0,04 -0,90 -1,65 -0,91 -1,75 -1,72
Efficiency Index 8,98 11,44 11,71 12,47 12,83 12,41 9,95 10,11 10,56 9,72
Sources: Singapore Airlines Annual Reports 1994-2012
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3.3.4.3.1.3 Financial Development Analysis
For the past two decades in focus of this thesis, 1993-2012, statistics for Singapore
Airlines show, that there was one single year, the fiscal year ending March 31st 2010,
when the airline did not achieve an positive operating profit (-27 million USD). On a
20-year average basis, Singapore Airlines reaches an operating profit of 473 million
dollars and an average operating ratio of 91,8% for this time span.
3.3.4.3.1.4 Operational Development Analysis
Singapore Airlines increased its numbers of passengers carried continuously from
about 9,3 million in 1993 to 15,3 million in 2002. For 2003, a drop by more than 2
million passengers can be seen and can be explained by the SARS-crisis.
Passenger numbers then continued growing, peaking 2008 with more than 19 million
carried passengers. 2009 to 2012 then show passenger numbers ranging between
16 and 17 million. In terms of fleet growth, a wave can be found. The company’s fleet
grew from 1993 (63 aircraft) to 2000 (102 planes), then declined until 2004 (84
aircraft) and grew again to 110 planes in 2011. 2012 statistics show 105 aircraft in
the fleet. Singapore Airlines Load Factors have ranged around 72% to 75% for a
long time, beginning in 2006 they increased slightly reaching 80,7% as the highest
load factor recorded in the company history in 2007. The 20 year average load factor
is 75%. As the company is operating a route profile that includes lots of long-haul
flights, it is relatively easy for Singapore Airlines to reach high utilization rates of their
aircraft. Back in 1993 it was 10,96 hours and slightly increased within the next ten
years before the number reached more than 15 hours between the years 2004 and
2008. After the World Financial Crisis, utilization time levelled off around 13 hours
daily, which is also the average utilization rate of the last 20 years: 12,9 hours.
3.3.4.3.1.5 Analysis of Key Indicators of Airline Development
Relative constant yields around 10 US-cents can be found for the period 1993 until
1997 before declining slightly down to around 8 cents between 1998 and 2003.
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Beginning from 2004 onwards, yields steadily increased to more than 13 cents in
2007 and 2008. 2009 yield is lower with only 12 cent but then continued its growth
and reached 15,5 cent in 2012. In terms of cost, Singapore Airlines was able to
produce at costs of less than 10 US-cent per ASM in 11 of the past 20 years. CASM
figures higher than 12 cents are only found for 2010 (12,4 Cents) and 2011 with a
CASM of 13,6 Cent. The Profitability Index for Singapore Airlines, based on statistics
available, can be calculated for the time span between 1993 and 2011. The average
Profitability Index for the two decades is -1,72. According to this Index, most
profitable years of Singapore Airlines were 2006 with a Profitability Index of -0,55
and especially 2007 with only -0,04. The most unprofitable year was 2003 with an
Profitability Index that is –4,3. In terms of efficiency the Efficiency Index relatively
stagnated for a long time between 1993 and 2001, reaching scores between 7,8 and
9,0. The index increased to more than 12 for the years 2006-2008. After this year it
stagnated around 10 for the following three years. For the last two decades,
Singapore Airlines reached an average Efficiency Index of 9,72.
3.3.4.3.2 Findings in Regard to Singaporean Airlines
As Singapore Airlines is the sole carrier within this case study, a comparison is not
made here. The general findings section of the thesis will compare the airline with
the other airlines in focus of case studies and also benchmark to Asia-Pacific airlines
and worldwide airlines.
3.3.4.3.3 Low Cost Carriers in Singapore
In the last years, a lot of LCC’s have emerged in Singapore. Named as being based
in Singapore are the countries first LCC, Valueair, that had begun operations in 2004.
Jetstar Asia (amongst its shareholders are the Australian airline Quantas as well as
Temasek Holdings) in 2005 merged with Valueair. Furthermore Tiger Airways
(amongst its shareholders are Singapore Airlines, Temasek Holdings and other
investment companies) has to be named as well as Scoot, a Singapore Airlines
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subsidiary that is operating the Low Cost Carrier model on medium and long-haul
routes.
Though Air Asia is not a Singaporean LCC, it offers more than 100.000 weekly
seats from and to Singapore. The company for a time considered setting up an
affiliate in the city-state but refrained from this as the government regulations in
Singapore are that free that it would have had no bigger benefit for the company.
(Centre for Aviation 2014s)
3.3.4.4 Aircraft Manufacturers and Singapore
Table 13: Aircraft orders and deliveries for Singapore Airlines
Aircraft in Operation Aircraft Orders
Airbus Boeing Airbus Boeing
Singapore Airlines 46 58 65 35
Sources: (The Boeing Company 2014) and (Airbus 2014)
Numbers of orders show that Singapore Airlines will further increase its fleet within
the next years.
3.3.4.5 Airport Development in Singapore
Table 14: Development of passenger and cargo numbers for Singapore airport 1997-2012
1997 2000 2003 2006 2009 2012
Passengers in
Mio.
25,2 28,6 24,7 35 37,2 51,2
Cargo in Mio.
Tons
1,38 1,73 1,61 1,91 1,63 1,81
Sources: (Association of South East Asian Nations 2004) (Association of South East Asian
Nations 2012)
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3.3.5 Case Study 4: Malaysia
3.3.5.1 Introduction to Malaysia’s Development
During the past 20 years, Malaysia, currently defined a middle-income country, was
successful “in diversifying its economy from dependence on exports of raw materials
to the development of manufacturing, services, and tourism. Malaysia is attempting
to achieve high-income status by 2020 and to move farther up the value-added
production chain by attracting investments in Islamic finance, high technology
industries, biotechnology, and services”. (Central Intelligence Agency 2014m)
The airline industry can be seen as an essential participant in order to reach
these aims and support the economic development of the country.
3.3.5.2 Development of Airline Growth Factors in Malaysia
3.3.5.2.1 Economic Growth Development in Malaysia
Malaysia has achieved economic growth in most years of the past two decades. Only
two exceptions can be found where economic growth in the form of GDP growth was
negative: The year 1998, affected by the Asian Financial Crisis and the year 2009,
affected by the World Financial Crisis. The combined growth ratio of the GDP of
Malaysia for the twenty years from 1993 until 2012 is 5,6%. In the first decade that
is in review by this thesis, the years 1993 until 1996 achieved GDP growth rates of
9% to 10%. The highest growth rate that can be found for within the last years lies
at 7,4% in 2010 after the economy recovered from the World Financial Crisis.
Economic growth in Malaysia therefore has benefitted to the airline industry and can
be seen as a growth factor for Malaysia’s airline industry.
3.3.5.2.2 Population Development and Urban Population in Malaysia
Malaysia’s total population has grown massively during the past two decades. It saw
an increase of more than 50%, from 19,7 million inhabitants in 1993 to 29,2 million
Malaysians in 2012. The share of Malaysian’s living in urban areas has also surged
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during the past twenty years. While in 1993, 53,3% percent of the population was
urban population (in absolute numbers 10,5 million people), this number gained
rapidly and has risen to 73,3% or in absolute numbers 21,5 million Malaysians. Both,
the increase of total population as well as the increase of the urban population share
(indicating a grown middle-class) can be regarded as having had positive influences
to the airline industry in Malaysia and can be seen as growth factor.
3.3.5.2.3 Development of Competition
Before Low Cost Carrier Air Asia entered the market, competition was very low with
Malaysia Airlines basically being the country’s only national airline. After Air Asia
entered, a classical duopoly could be found although there still existed a lot of routes
that were still only served by one of both competing airlines.
Tham explains: “Since then, competition has heightened between the Full
Service Carrier and the Low Cost Carrier. First, in February 2008, the virtual
monopoly of MAS and SIA on the Kuala Lumpur–Singapore route was ended with
entry of three budget carriers on this route. This lucrative route was served by 180
flights a week by MAS and SIA and 14 flights by Japan Airlines under Fifth Freedom
rights prior to 2008. Air Asia from Malaysia, and Tiger Airways and Jetstar Asia from
Singapore have been allowed limited flights on this route.” Malaysia Airlines and
Singapore Airlines then terminated their 30-year-old “Shuttle Agreement” which
allowed them to fix their fares. (Tham 2008)
As other LCC have started entering the market in the last years, competition
can be seen as growing.
3.3.5.2.4 Development of Alternative Transportation in Malaysia
Malaysia does not have any high speed railways networks. The country’s traditional
network of rail lines does not cover much of the country. In 1993, Malaysia had a
total of 1.668 rail line route kilometres and this has not changed mentionable until
2010. An increase in network can only be found for the years 2011 and 2012 with
rail way lines then having a length of 2.250 kilometres. Considering the size of the
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country, its coverage is still very low. The development of railway passengers carried,
according to the statistics of the World Bank, is unequal and varying a lot but has
generally increased during the past two decades. 2012 shows as double as much
passengers carried compared to 1993. Although this is an increase, the development
of alternative transportation in Malaysia cannot be seen as having had negative
impacts onto the airline industry – especially as alternative modes of transportation,
due to the geography of the country being split onto two “main islands”, often are no
alternative.
3.3.5.2.5 Development of Malaysian Government Regulations
In Malaysia, the Department of Civil Aviation (an office of the Malaysian Ministry of
Transport) is the institution that regulates civil aviation affairs like regulations. The
importance and far-reaching impacts of the ASEAN Open Sky policy have already
been explained before. The Department of Civil Aviation so far has signed one
hundred bi-lateral air agreements with countries to support the airline industry
development. (Ministry of Transport Malaysia 2013)
In addition to its bi-lateral air agreements, in 2007 a multi-lateral air agreement
was signed between Malaysia and the European Union, removing nationality
restrictions in the bilateral air services agreements and allowing airlines of Malaysia
and the European Union to fly between any member country of the European Union
and Malaysia. (European Commission for Mobility and Transport 2007)
As a growth factor, these developments have benefitted to the development
of the airline industry.
1.1.1.1.2 Tourism Development in Malaysia
Tourism is developed strongly in Malaysia as it was already said before. The country
has been highly successful with its efforts to increase the number of incoming
tourists as statistics of the World Bank show. Back in 1995, which is the first year,
where statistics available, nearly 7,5 million international tourists were arriving in
Malaysia. This number has more than tripled within the following 18 years to 25
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million tourist arrivals in 2012. Drops in tourist arrival numbers can be found for the
years of the Asian Financial Crisis 1997 and 1998 as well as for 2003 when SARS
was affecting the Asian countries. The number of Malaysian’s travelling
internationally has also risen from 20,6 million in 1995 by 50% to 30,7 million in 2004.
This year is the latest for which the World Bank provides data. Generally it can be
distinguished that tourism was a big growth factor for the airline industry in Malaysia
during the last two decades.
3.3.5.3 Airlines in Malaysia
3.3.5.3.1 Air Asia Group
3.3.5.3.1.1 Introduction to Air Asia and its Development
Malaysia’s Government in 2001 approved the establishment of the country’s first
Low Cost Carrier, Air Asia. It emerged out of a formerly government-owned Full
Service Airline conglomerate, established already in 1993, that was totally
unprofitable. It was sold to Tony Fernandes’ company Tune Air for the symbolic sum
of one Malaysian Ringgit in 2001 and he managed to change the airline’s business
model quickly, transforming Air Asia into a Low Cost Carrier and reaching a profit
only one year after the aquistion of Air Asia. Initially, the company operated on
domestic routes throughout the entire country but relatively quick started operating
international flights. (Tham 2008)
As the success of Air Asia was immense, the company soon wanted to
expand onto other markets. Because of regulatory conditions, Air Asia formed a joint-
venture carrier with the Shin Corporation of Thailand for being able to enter the Thai
market. Air Asia is holding the allowed maximum of 49% in the new company Thai
Air Asia. Operations of Thai Air Asia commenced in early 2004 and the next step of
expanding its network to Indonesia already followed in November 2004. Air Asia
purchased a 49% stake of the AWAIR airline company. The company was
transformed into a Low Cost Carrier and began operations in December of the same
year under its new name Indonesia Air Asia. (Zhang, et al. 2008)
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As of 2014 the Air Asia Group has two more affiliated companies: Air Asia X,
a Malaysia-based Low Cost Carrier that is – by contrast to traditional Low Cost
Carriers – operating the LCC model on long-haul flights, e.g. flights from Kuala
Lumpur to Australia. Furthermore Philippines‘ Air Asia has been launched. The Air
Asia Group’s network now comprises flights to more than 20 countries meaning that
there is no South- or North East Asian country that is not served by the Air Asia
Group with its slogan „Now Everyone Can Fly“. Air Asia has been awarded “World’s
Best Low Cost Airline” by Skytrax for five consecutive years in 2009, 2010, 2011,
2012 and 2013. (Air Asia 2014)
As mentioned and explained above, the Air Asia Group can not only be seen
as a Malaysian carrier but publishes statistics for the entire group only. As Air Asia
Malaysia is still the biggest part of the group, it is analysed as part of the Malaysian
case study. It is furthermore the only Low Cost Carrier that is analysed as part of a
case study in this paper, for two main reasons. The Air Asia Group is – compared to
its LCC competitors in South- and North East Asia – relatively old. Furthermore, it
publishes financial and operating statistics what a lot of other LCC’s in the region do
not. Air Asia has its main base at the Low Cost Carrier Terminal of Kuala Lumpur
International Airport and is operating a network of regional and domestic routes. Its
affiliated companies also operate regional and domestic flights from its respective
hubs abroad. The average stage length of flights of the Air Asia Group is 710 miles.
3.3.5.3.1.2 Statistical Data for Air Asia
Statistical data for Air Asia is a special case. The airline began operations at the end
of 2002 and comprehensive statistics were only released from 2004 onwards.
Furthermore, the Air Asia Group had adapted a financial year ending on 30th June.
This practise was changed in 2007 and the calendar year was chosen instead of
having a financial year uneven to the calendar year. This fact hinders in comparisons
with other airlines for the years 2004 until 2007 but – as this data is highly interesting
though – will be shown and used for the airline analysis and showing its development.
Comparisons with other airlines will be made generally on an average 8-year basis
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(excluding the second half of 2007 as this would lead to wrong numbers) or from
2008 onwards only then.
Table 15: Statistical data for the Air Asia Group, mid 2004 - 2012
financial year ending June 30 until 2007 6
months
Financial Data 2004/2005 2005/2006 2006/2007 2007 2008 2009 2010 2011 2012
Ø past 8y
Revenue 215 321 480 328 855 890 1.226 1.469 1.606
Expenses 178,4 298,5 395,8 256,9 960,2 630,7 894,7 1.088,9 1.271,8
Operating Profit 37 22 84 71 -105 259 331 380 334 168
Operating Ratio 83,0% 93,1% 82,5% 78,4% 112,3% 70,9% 73,0% 74,1% 79,2% 83,5%
Net Income after Taxes -30 -60 149 -127 -149 144 330 181 594
Yield - ¢ per RPM 2,69¢ 3,29¢ 3,64¢ 4,07¢ 4,45¢ 4,02¢ 5,03¢ 5,63¢ 5,66¢ 4,30¢
Cost - ¢ per ASM 2,19¢ 2,95¢ 3,16¢ 3,22¢ 5,00¢ 2,85¢ 3,67¢ 4,18¢ 4,48¢ 3,56¢
Operating Data
RPMs (mil.) 4.881 6.702 9.863 5.930 14.439 16.890 18.499 21.037 22.731
ASMs (mil.) 6.525 8.646 12.391 7.919 19.217 22.159 24.362 26.074 28.379
Load Factor 74,8% 77,5% 79,6% 74,9% 75,1% 76,2% 75,9% 80,7% 80,1% 77,5%
Passengers (000) 4.114 5.719 8.737 5.198 11.808 14.253 16.054 17.987 19.679
Flight Stage (miles) 636 723 676 735 750 725 736 722 713 710
Number of Aircraft 27 42 54 65 78 84 90 97 118
Average Seats / Aircraft 180 180 180 180 180 180 180 180 180 180
Utilization (hours/day) 12,1 12,0 12,0 11,9 11,8 12,0 12,2 12,3 12,3 12
Profitability Index -0,18 -0,40 -0,26 -0,17 -1,66 0,21 0,15 0,36 0,05 -0,21
Efficiency Index 9,05 9,30 9,55 8,91 8,87 9,15 9,26 9,92 9,85 9,37
Sources: Air Asia Yearly Reports 2006-2013
3.3.5.3.1.3 Financial Development Analysis
Since July 1st, 2004 until the end of 2012, Air Asia did experience one single year
where it could not achieve a positive operating profit. This was in 2008, probably a
result of the World Financial Crisis, were statistics show an operating profit of -105
million USD. The average yearly operating profit for the 8 years was 168 million
dollars. Best operation ratios were achieved in the years 2009, 2010 and 2011 where
operating ratios ranged between 70,9 percent and 74,1 percent. An average
operating ratio of 83,5% can be calculated for the 8 year time span defined above.
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3.3.5.3.1.4 Operational Development Analysis
Air Asia experienced high growth rates in terms of passengers during the last 8,5
years. The company carried 4,1 million passengers in its financial year (FY) 2005.
This number increased to more than 19,7 million in 2012 – a quintupling. Fleet size
was growing analogously to passenger numbers. The development of the
company’s load factors can be described as increasing from FY2005 (74,8%) to
2012 (80,1%) with a drop in the years 2008-2010, resulting in an 20-year-average
Load Factor of 77,5%. In terms of aircraft utilization rates, the company managed to
use its fleet 12 hours a day from FY2005 onwards with discrepancies of a maximum
of 0,3 hours up or down, resulting in an 8-year aircraft utilization rate of 12.
3.3.5.3.1.5 Analysis of Key Indicators of Airline Development
Yield data for Air Asia is available for the past eight years. The height of yields
increased every year with exception of the year 2009. The past 8-year average yield
is calculated at 4,3 cents. In terms of cost, Air Asia was able to produce at costs of
less than 10 US-cent per ASM in any of the past 8 years. CASM figures of lower
than 3 cents can be found for the FY2005 and FY2006 as well as the year 2009. On
an average basis for the last 8 years, the CASM figure is 3,56 cent. The Profitability
Index for Air Asia Group, based on statistics available, can be calculated for the time
span between FY2005 and 2012 with the exception of the months July until
December of the year 2007 as mentioned before. The average Profitability Index for
these 8 years is -0,21. According to this index, most profitable years of the airline
were the four last years between 2009 and 2012 with all of these indexes being
larger than 0,05. The most unprofitable year was 2008 with a Profitability Indexes of
-1,66. In terms of efficiency the Efficiency Index relatively stagnated within the time
frame that is looked after, reaching scores between 8,87 and 9,85. For the last eight
years, the Air Asia Group reached an average Efficiency Index of 9,37.
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3.3.5.3.2 Malaysia Airlines
3.3.5.3.2.1 Introduction to Malaysia Airlines
The Malaysian government is owning the nation’s flagship carrier, Malaysia Airlines.
The airline operates domestic, regional and long-haul international flights and can
be seen as a traditional Full Service Carrier. Its main hub is Kuala Lumpur
International Airport. The company’s stage length has significantly changed within
the last years: Back in 1993, it was 429 miles and has continuously increased during
the past two decades to more than 1300 miles in the years 2007 until 2012. This
gives an 20-year-average stage length of 932 miles.
3.3.5.3.2.2 Statistic Data for Malaysia Airlines
Table 16: Statistical data for Malaysia Airlines, 1994-2012
financial year ending 3/31 until 2006
Financial Data 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Passenger Revenue 1.212 1.500 1.677 1.892 1.567 1.550 1.566 1.769 1.810 1.877
Total Revenue 1.493 1.889 2.265 2.407 1.981 1.929 1.913 2.161 2.288 2.333
Expenses 1.565 1.830 2.195 2.342 2.120 1.633 2.061 2.575 2.508 2.295
Operating Profit -72 59 70 65 -139 295 -148 -414 -220 38
Operating Ratio 104,8% 96,9% 96,9% 97,3% 107,0% 84,7% 107,7% 119,2% 109,6% 98,4%
Net Income after Taxes 57 104 87 128 -78 -180 -11 -449 -220 89
Yield - ¢ per RPM 11,18¢ 11,87¢ 11,50¢ 11,34¢ 8,77¢ 8,49¢ 7,48¢ 7,50¢ 8,12¢ 8,19¢
Cost - ¢ per ASM 9,92¢ 10,19¢ 10,57¢ 9,70¢ 8,17¢ 5,81¢ 6,89¢ 8,13¢ 7,69¢ 6,97¢
Operating Data 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
RPMs (mil.) 10.840 12.636 14.587 16.692 17.873 18.251 20.946 23.580 22.289 22.927
ASMs (mil.) 15.788 17.956 20.774 24.136 25.948 28.089 29.926 31.668 32.631 32.945
Load Factor 68,7% 70,4% 70,2% 69,2% 68,9% 65,0% 70,0% 74,5% 68,3% 69,6%
Passengers (000) 13.077 14.250 15.408 15.118 15.659 13.654 14.985 16.592 16.311 16.208
Flight Stage (miles) 429 448 402 571 586 674 803 813 798 770
Number of Aircraft 74 74 79 80 87 79 79 77 79 83
Average Seats / Aircraft 221 229 227 225 227 240 233 229 233 230
Utilization (hours/day) 6,45 8,49 9,48 9,99 10,26 10,22 10,53 11,74 11,71 11,62
Profitability Index -2,23 -1,83 -2,50 -1,86 -2,13 -0,29 -1,65 -2,54 -2,14 -1,27
Efficiency Index 4,43 5,98 6,65 6,91 7,07 6,64 7,37 8,75 8,00 8,09
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fiscal calendar
Financial Data 2004 2005 2006 2006 Ø past 20y
Passenger Revenue 1.923 2.429 2.600 2.469 2.723 2.601 1.991 2.923 3.465 3.359
Total Revenue 2.721 3.061 3.059 3.549 3.946 4.627 3.405 4.236 4.549 4.474
Expenses 2.720 3.012 3.589 3.604 3.678 4.580 3.585 4.181 5.300 4.591
Operating Profit 1 49 -530 -55 268 47 -180 55 -751 -117 -84
Operating Ratio 100,0% 98,4% 117,3% 101,5% 93,2% 99,0% 105,3% 98,7% 116,5% 102,6% 102,8%
Net Income after Taxes 110 86 -440 -37 257 82 153 74 -825 140
Yield - ¢ per RPM 8,41¢ 9,16¢ 8,85¢ 9,67¢ 10,93¢ 11,67¢ 9,74¢ 12,43¢ 14,03¢ 14,54¢ 10,19¢
Cost - ¢ per ASM 7,95¢ 7,77¢ 8,76¢ 9,84¢ 10,55¢ 13,94¢ 12,06¢ 13,56¢ 16,09¢ 14,85¢ 9,97¢
Operating Data 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
RPMs (mil.) 22.872 26.509 29.394 25.539 24.915 22.288 20.440 23.512 24.688 23.096
ASMs (mil.) 34.218 38.784 40.958 36.615 34.863 32.852 29.726 30.829 32.932 30.908
Load Factor 66,8% 68,4% 71,8% 69,8% 71,5% 67,8% 68,8% 76,3% 75,0% 74,7% 70,3%
Passengers (000) 15.144 17.307 18.211 15.466 13.962 12.631 11.947 13.112 13.301 13.389
Flight Stage (miles) 761 1.074 1.087 1.193 1.406 1.394 1.357 1.371 1.379 1.328 932
Number of Aircraft 87 97 97 91 85 87 84 89 102 114
Average Seats / Aircraft 238 242 225 237 237 237 234 227 229 224 231
Utilization (hours/day) 11,3 11,92 12,71 10,12 10,78 10,35 9,59 10,16 9,70 8,22 10,27
Profitability Index -2,33 -1,50 -2,41 -3,10 -2,74 -6,03 -5,36 -4,08 -5,57 -3,99 -2,78
Efficiency Index 7,55 8,15 9,13 7,06 7,71 7,02 6,60 7,75 7,28 6,14 7,21
Sources: Annual Reports of Malaysia Airlines 1997-2012
3.3.5.3.2.3 Financial Development Analysis
Financial statistics for Malaysia Airlines show that the company experienced
negative operating profits in ten years within the last two decades. The worst
operating results were achieved in the years 2000, 2005 and 2011 with a combined
operating loss of 1,7 billion USD. Most profitable years were 1998 (operating profit
of 295 million USD) and 2007 (operating profit of 268 million USD). The company
made an average operation profit of minus 84 million USD during the past 20 years,
resulting in an average operation ratio of 102,8%.
3.3.5.3.2.4 Operational Development Analysis
The airline did not experience high growth rates in terms of passengers. Malaysia
Airlines carried slightly more than 13 million passengers in 1993. This is also the
number of carried passengers in 2012. As the stage length has more than tripled
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during the time, more aircraft were needed as they were flying longer routes. The
number of aircraft has risen from 74 in 1993 to 114 in 2012. ASM data also confirms
this development, an increase from 15,7 million AMS’s in 1993 to 30,9 million ASM’s
in 2012 – nearly double as much as 1993. RPM’s even show the development better,
having increased from 10,8 million RPM’s in 1993 to 23,1 million in 2012. Load
factors have varied between 68,3 percent and 71,8% in most years until 2009.
Exceptions can be found with a load factor of only 65% in 1998 and a load factor of
74,5% in the year 2000. The following years, Malaysia Airlines managed to increase
the load factor and reached around 75% in the last three years. The average factor
for the last two decades is 70,3%. In terms of aircraft utilization rates, the company
developed successfully from 1993 (6,45 hours) to 12,71 hours in 2005. Numbers
then decreased slowly to only 8,22 hours in 2012. Combined utilization rate for the
past two decades is 10,27 hours.
3.3.5.3.2.5 Analysis of Key Indicators of Airline Development
Average yield for the last 20 years of Malaysia Airlines operations is 10,19 US-Cent.
From 1993 onwards, yield figures were stable at levels of more than 11 cents for four
years but then declined by around 3 Cents to numbers of about 8 cents until 2003.
From then on, yield figures increased steadily until they reached 14,54 cents in 2012.
In terms of cost, Malaysia Airlines was able to produce at costs of less than 10 US-
cent per ASM in 12 of the past 20 years. Especially during the past six years, cost
have increased and latest numbers for 2012 show a cost of 14,85 cent per ASM. On
a 20 year average basis, Malaysia Airlines CASM lies at 9,97 US-cents. The
Profitability Index for Malaysia Airlines shows that 1998 was the most profitable year
for the company, reaching an index of -0,29. 2008 was the year with the lowest
Profitability Index, -6,03, driven by high costs for producing ASM’s, and a lower load
factor. The average Profitability Index for the last 14 years is -2,78. In terms of
efficiency as already shown in the operational data section, Malaysia Airlines was
able to improve from an Index of 4,43 in 1993 to an index of 9,13 in 2005. From this
time on though, it then decreased until 2012 were it was only standing at 6,14
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although the stage length development should have benefitted to a further increase.
For the last two decades, Malaysia Airlines reached an average Efficiency Index of
7,21.
3.3.5.3.3 Findings in Regard to Airlines of Malaysia
When comparing LCC Air Asia to its competitor Malaysia Airlines, a FSC differences
can be expected caused by varying business models. Statistics proof that there exist
large differences: In terms of RPM’s, Air Asia is growing quickly supported by growth
factors like GDP, population growth and an increased middle class and high tourist
number growth that all have benefitted massively to this development. By contrast
one can distinguish that Malaysia Airlines also managed to grow its RPM’s although
this increase took place in the ten years when Air Asia was not yet operating and
competing with the airline. Comparing only the time span, for which statistics are
available for Air Asia, Malaysia Airlines made an average operating profit of minus
135 million USD. Figures for Air Asia are plus 168 million.
Looking at the CASM figures, Air Asia produced at cost of 3,56 cent per ASM,
Malaysia Airlines for the same time has a CASM figure of more than three times as
high (11,54 cents) although it’s much higher stage length can be regarded as
advantage. The FSC has an Efficiency Index of 7,44 for the last 8 years, Air Asia
has one of 9,37. In terms of Profitability Index’s, Air Asia records an Index of -0,21
for the time from mid-2004 until 2012. For the same time, Malaysia Airlines’ Index
stands at -3,71. These figures can explain why Air Asia is that successful with its
business model and works highly profitable.
3.3.5.3.4 Other Malaysian Airlines
Amongst the small Berjaya Air that operates regionally with a focus on connecting
Tioman to Malaysia and Singapore, Firefly Airlines is worth mentioning.
It was founded in 2007 and is completely owned by Malaysia Airlines. It has
hubs in Penang and Subang, Kuala Lumpur’s “old” airport. Its targets are competition
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with Air Asia and complementing the Malaysia Airlines network in regard to
destinations that are not financially viable for operation by its mother Malaysia
Airlines as a Full Service Carrier destination. (Tham 2008)
The latest addition to the Malaysian airline market was the launch of Malindo
Air, an affiliate of Indonesia’s Lion Air Group. It neither cannot be clearly classified
as a Low Cost Carrier nor as a Full Service Airline – as the airline is operating a
hybrid business model that for example includes some free check-in luggage, trying
to compete both with Air Asia and Malaysia Airlines. As Malindo Air operates
domestically this brings further competition to the Malaysian market. (Centre for
Aviation 2013)
3.3.5.4 Airports in Malaysia
Malaysia’s Government has been and still is investing in infrastructure such as
airports as it sees transportation infrastructure like airports vital for the development
of the country. In terms of airports that do not only have a point to point function but
a hub-function like Malaysia’s main airport, Kuala Lumpur International (KLIA) the
government continuously wants to boost the competiveness of the airport that is
competing with other hub-airports in the region, like Singapore Changi International
Airport or Bangkok Suvarnabhumi International Airport that can be seen as the main
competitors of Kuala Lumpur International Airport and all three of them are regularly
named as being amongst the world’s best airports. (Tham 2008)
Since commencing operations in 1998, KLIA, the new capital airport replacing
Subang Airport, has won numerous awards from international organisations such as
Skytrax and International Air Transport Association. (Kuala Lumpur International
Airport 2014)
But Kuala Lumpur International Airport does not only play a large role serving
as a Full Service Carrier Airport including a hub-network. It has already had a Low
Cost Carrier Terminal for the last couple of years, processing around 15 million
passengers in 2013. In May 2014, the new budget terminal, called KLIA2 has opened.
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It is the biggest Low Cost Carrier Terminal worldwide and has been designed to
handle up to 45 million passengers per year. (Deutsche Presse Agentur 2014)
Malaysia, as of 2013, has a total of 62 airports, 38 of them offering commercial
airline service. The country has a total of 8 airports that offer international services.
With the exception of Johor Bahru’s Senai International Airport, which is
independently operated, all of them are operated by Malaysia Airports Holdings.
Table 17: Passenger numbers for Malaysia's 10 biggest airports between 1996 and 2013
Top 10 Airports Passengers in Mio.
Ranking as of 2013 1996 2000 2004 2007 2010 2013
1 Kuala Lumpur Intl. 14.7 21.1 26.5 34.1 47.5
2 Kota Kinabalu Intl. 2.6 3.1 3.3 4.4 5.2 6.9
3 Penang Intl. 2.9 2.7 3.0 3.2 4.2 5.5
4 Kuching Intl. 2.2 2.5 3.3 3.2 3.7 4.9
5 Miri Intl. 1.0 1.0 1.5 1.5 1.7 2.2
6 Langkawi Int. 0.7 1.0 0.8 1.1 1.4 1.9
7 Johor Bahru Intl. 1.0 1.1 1.5 1.3 1.2 1.9
8 Subang 14.6 2.1 0.1 0.1 1.1 1.9
9 Kota Bharu Intl. 0.6 0.5 0.6 0.8 1.0 1.6
10 Sibu 0.7 0.7 1.5 0.8 1.0 1.4
Sources: Malaysia Airports Annual Reports 2005, 2013 and Senai Airport Passenger Statistic
Table 18: Passenger and cargo statistics for all Malaysian airports 1996-2013
All Airports 1996 2000 2004 2007 2010 2013
Passengers in Mio. 31.1 34.0 30.9 46.5 59.0 81.5
Cargo (000 tonnes)4 543 775 957 997 918 937
Sources: Malaysia Airports Annual Reports 2005, 2013 and Senai Airport Passenger Statistic
4 Cargo statistics exclude figures for Johor Bahru Senai Airport as no data is available
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Looking at Malaysia’s airports statistics that are available from the year 1996
onwards only, one finds a massive growth in passenger numbers. Total passenger
numbers for all Malaysian airports grew from 31.1 million passengers in 1996 to 81.5
million passengers carried in the year 2013. This is an increase of 262% for the time
span of the last 18 years, averaging a yearly growth rate of 5.5%. The country’s main
airport KLIA even grew at a faster rate than the country’s average. Between the year
2000 (first data as the airport was opened in 1998) and 2013 it could more than triple
its passenger numbers from 14.7 million to 47.5 million people. Cargo freight in
Malaysia experienced high growth rates until the middle of the last decade. Within
the eight years between 1996 and 2004 cargo numbers almost doubled from 543
tonnes to 957 tonnes. By contrast to steadily rising passenger numbers, from 2004
until today cargo numbers remained rather static.
3.3.5.5 Aircraft Manufacturers in Malaysia
Table 19: Aircraft orders and deliveries for Airlines in Malaysia
as of April 2014 Aircraft Delivered Aircraft Orders
Airbus Boeing Airbus Boeing
1 Malaysia Airlines 21 81 12
2 Air Asia Group 183 315
Sources: (The Boeing Company 2014) and (Airbus 2014)
Numbers above indicate that Malaysia Airlines does not plan to grow
significantly in the future whereas the Air Asia Group will experience a massive fleet
growth.
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3.3.6 Findings regarding the Development of the Airline Industry in
South- and North East Asia in the Past
Table 20: Development of Airline Industry Growth Factors for China, Japan, Singapore and Malaysia
within the time span from 1993 until 2012
China Japan Singapore Malaysia
Economic growth (GDP) ++ o + ++
Impact of crises - -- -- --
Population growth/structure ++ + ++ ++
Competition/falling
prices - + ++ ++
Alternative transportation -- -- o o
Government regulations - + ++ +
Tourism growth ++ ++ + ++
Key
++
development of this growth factor benefitted very much to the growth of the
airline industry
+ development of this growth factor benefitted to the growth of the airline industry
o development of this growth factor had not influence
- development of this growth factor was (still) a threat to the growth of the airline industry
-- development of this growth factor was (still) a heavy threat to the growth of the airline industry
The table above shows in what extent growth factors of the airline industry
have developed during the past two decades and therefore influenced the airline
industry of the particular countries.
As the accessibility of a place by air transport helps to define its access to global
flows of goods, people, information, ideas, and capital, it is not surprising that a
coherency between the growth of a country’s GDP and its airline industry growth can
normally be found.
For China, an average GDP growth of 10,2% was found for the last two
decades. China’s “big three” grew at 20-year-average rates of: 13,4% (Air China),
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15,8% (China Eastern) and 15,9% (China Southern). These numbers are higher than
the average growth numbers of Chinese airports in terms of passengers (13,1%)
and cargo (9,8 percent) within the last years. The three carrier’s operating ratios are
92,8% for Air China, 94,5% for China Eastern and 94,4% for China Southern.
In the case of Japan, an average GDP growth of 0,83% took place within the
last 20 years. All Nippon Airways managed to grow at a higher rate than the country’s
GDP, 2,6% while Japan Airlines has a 20-year-average growth rate that is -0,7%. All
Nippon Airways achieved an operating ratio of 97%, Japan Airlines reached 97,7%.
The passenger and cargo numbers at Japan’s airports grew with rates of -0,25%
respectively 2,5 percent.
Singapore sported an average annually GDP growth of 6% during the past 20
years while the nation’s carrier Singapore Airlines only grew by 4% but achieved a
very good operating ratio of 91,8% for this time. Passenger numbers at Singapore
Changi Airport were slightly higher than SIA’s: 4,5% although the increase for cargo
was only 1,7%.
GDP growth for the past 20 years of Malaysia reached 5,6% annually which
nearly equals the increase of passengers travelling from Malaysian airports (5,5%).
Cargo numbers for this time span range at 3,1%. The country’s national carrier
reached a 20-year-average operating ratio of 102,8% whereas Air Asia – even if only
on an 8-year-average basis reaches a number of 83,5%. Respective traffic growth
rates for the carriers lie at 3,9% for Malaysia Airlines and massive 21,2% in the case
of the Air Asia Group although it has to be mentioned that the group also operated
from its Thailand and Indonesia bases.
Looking at the results that the 22 most important Asia-Pacific airlines5 (all of
them FSC’s) reached during the same period, a combined average yearly traffic
growth of 5,7% and operating ratio of 96,2 percent is found. For the leading 78 FSC
world airlines6 these numbers amount to a combined average yearly traffic growth
of 4,7% during 1993 and 2012 and an operating ratio of 97,4% for this time.
5 Numbers were obtained from the Centre of Aviation through a phone interview in February 2014
as these are found in a database which is not published in the internet. 6 See above.
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By comparing these results from Asia-Pacific and the world, on finds that all
three Chinese airlines performed better than the average of Asia-Pacific and the
world, both in terms of passenger development as well as in terms of the operating
ratio. The two Japanese airlines performed inferior to Asia-Pacific and world airlines
in terms of traffic development but were at the same level of world airlines regarding
their operating ratios. Singapore Airlines achieved a remarkably good operating ratio
during the past two decades, the best of all Full Service Airlines in focus of this thesis
and much better than the averages of Asia-Pacific and world airlines although the
company did not achieve traffic growth as high as many of its competitors. Malaysia
Airlines can be regarded as the weakest performing airline that is in focus of this
paper, also compared to world- and Asia-Pacific airlines both in terms of traffic
development as well as in terms of operating ratios. Last but not least, the Air Asia
Group has to be mentioned. It stands out with an operating ratio of 83,5% for the
past 8 years and traffic growth rates of more than 20%.
This means that in regard to the first research question, which countries of
South- and North East Asia sport the most pronounced growth in the aviation sector
within the last two decades and what factors can be seen as the reasons for this
growth China and its “big three” have to be named in terms of FSC-growth in the
aviation sector, driven by changes in the population structure, economic growth and
growth in the tourism sector. Regarding South East Asia, Malaysia can be named in
terms of growth in the Low Cost Carrier aviation sector, driven by falling airfare prices
due to increased competition, economic growth, an emerging middle class and
increasing tourism. In regard to the second question, which airlines were best able
to cope with and profit from the changes in the North- and South-East Asian aviation
sector, and what the key reasons for their success are, the Air Asia Group must be
named as it was highly successful with its Low Cost Carrier strategy. Singapore
Airlines on the other hand was also successful by positioning itself as a Full-Service
long-haul carrier benefitting from an extreme high reputation and relatively low
CASM. Answering the third question, why the penetration of South- and North East
Asian countries by Low-Cost Carriers is still very uneven and how has the Low-Cost
aviation sector in North- and South-East Asia developed within the last years it can
105
be said that this thesis has shown that especially the regulatory conditions have been
and still are much better in the South East Asian countries than in China and Japan.
Numbers have shown that the LCC-sector now accounts for nearly 60% of intra-
ASEAN travel while this figure ranges below 10% for the intra North East Asian travel.
Anyhow, especially during the last two years, a lot of LCC have established in North
East Asia so that the North East Asian LCC sector is likely to grow in the future.
4 Future Development of the Aviation Industry in North- and
South-East-Asia
Foreseeing the future of the airline industry is a risky and difficult task for an industry
being influenced by so many internal and external factors.
Airbus and Boeing, and their smaller competitors like Embraer and
Bombardier, regularly publish forecasts that seek to deliver an outlook into the next
twenty years of aviation by forecasting the demand for civil aircraft. These reports
are not only important for the aircraft manufacturers themselves but also serve as
references for airlines, investors and governments that deal with the airline industry.
By looking at the key economic and operational drivers of air transport markets
relatively precise forecasts can be achieved. In terms of growth factors of the airline
industry, for the first time ever in 2012, more than a billion people worldwide went
abroad for tourist travel. That means that the number of foreign tourists since 1950
has risen more than forty times. The World Tourism Organization (UNWTO)
estimates this number to further rise to around 1,8 billion people in the year 2030.
(Airbus Global Market Forecast 2013-2032)
This is can be regarded as an enormous important growth factor for the next
two decades.
According to DESA, the United Nations Department of Economic and Social
Affairs, the world’s population will have grown to 8.4 billion people in 2032. This will
lead to a strong and rapid urbanization as well as a growth of the middle-class,
especially in Asia. DESA estimates that the proportion of people living in large urban
106
agglomerations of over 5 million people will increase from 18% in the year 2012 to
23%. This means that in 2025, 1 billion people will live in 96 cities of over 5 million
inhabitants, with the largest population centres focused in Asia. Tokyo will remain
the largest of those mega-cities with a population of more than 38 million inhabitants
in 2025. Shanghai is projected to have 28 million residents then. Beijing, Manila,
Shenzhen and Guangzhou, all located in North- and South-East Asia, will also
belong to the 20 biggest cities worldwide by then. These mega-cities are places
where an increasing number of people will live, work and want to travel from and
between. Therefore, they are focal points for a large amount of future growth in the
aviation industry. Global middle-class is expected to grow by 60% between 2012
and 2022, and by 134% between 2012 and 2032, most of the growth coming from
Asia. The region will represent two thirds of the 5.2 billion global middle-class
population in the year 2032, to be specific 3.5 billion people. This means that the
middle-class in Asia-Pacific will be four times bigger than today. The number of
Aviation Mega-Cities, defined as cities that are handling more than 10.000 long-haul
passengers per day, will increase significantly. As per the definition above, in 2012
there existed 42 Aviation Mega-Cities worldwide, the majority of them located in the
northern hemisphere. By 2032, the total number of them is expected to increase to
89. Most of these new Aviation Mega-Cities are expected to be situated in the
southern hemisphere then, including 8 out of 24 of the largest category of Aviation
Mega-Cities, handling more than 50.000 long-haul passengers daily, in South- and
North-East Asia: Seoul, Tokyo, Beijing, Shanghai and Hong Kong in North East Asia
and Bangkok, Kuala Lumpur and Singapore in South East Asia. By contrast, in 2012
there only existed seven of them, only two located in North- and South East Asia:
Singapore and Tokyo. (Airbus 2013)
In terms of the development of competition and regulatory conditions, as the
analysis has shown, regulatory restrictions have been significantly lowered within
the last years. This brings bright prospects for the development of the airline industry.
China, for example, is continuing with opening up its airline industry and expects
increasing and freer competition. Especially the final implementation of ASEAN
Open Sky will bring levels of extremely high competition to South-East-Asia that by
107
now already has emerged as one of the fastest growing airline markets worldwide.
Low Cost Carriers, operating in an extremely competitive environment, today make
up around 60% of the regions travel. As LCC’s have continuously been floating the
market with more and more capacity there can now be seen growing signs of
overcapacity, especially in the Low Cost Carrier dominated domestic and short-haul
international markets. This means that 2014 will already be a challenging year for
South-East-Asia’s airlines suffering from lower yields and weak load-factors. Yet –
as the region’s GDP as well as the middle class is growing – there is an excellent
basis for the further development of the airline industry in South East Asia. (Airline
Leader 2014)
Boeing and Airbus forecast growth in air travel that they measure in RPK
(Revenue Passenger Kilometers) calculated by the global level formula:
RPK growth = GDP growth + f(t). This formula is used because historically
seen, growth in air travel has outpaced economic growth that is measured by GDP
growth. Therefore f(t) is a time-varying function that normally ranges around 2%.
Boeing analysts explain that the formula above is true for the global level of aviation
whereas for a regional level, between 60 and 80% of air travel growth can be
attributed to economic growth. (Boeing Company 2013)
As this thesis uses the Revenue Passenger Miles as it is common in many
airline statistics, kilometers are converted into miles in order to make it comparable
with the statistics and findings of this thesis.
Domestic travel in China is forecasted to grow at an average annual rate of
6,9% from 250 billion RPM’s up to 944 billion RPM’s in 2032 which would nearly
mean a quadrupling within the next two decades. All other traffic originating from
China going to other regions of the world is forecast to grow at average annual rates
of more than 6% with the only exception being regional traffic to neighbouring
countries in North East Asia, where average growth rates of only 2,5% are expected
for the time span between 2013 and 2032. (Boeing Company 2013)
Spring Airlines, the nation’s biggest LCC (11th largest Chinese carrier) and
Juneyao Airlines though have demonstrated that it is possible to succeed in China’s
108
heavily regulated market which favours the state-owned ‘Big Three’ carriers. (Airline
Leader 2012)
For the South East Asia region, Boeing experts estimate an average yearly
GDP growth of 4,7% for the region. Regional travel within South East Asia is forecast
to grow by a yearly average of 7,5%, going up from 94 billion RPM’s in 2012 to 400
billion RPM’s in the year 2032. That would be more than quadrupling the current
number of RPM’s. The total average yearly growth rate for traffic is expected to be
6,7%. Looking at North East Asia, regional travel within North East Asia is forecast
to grow by a yearly average of 2,5%, going up from 60 billion RPM’s in 2012 to 100
billion RPM’s in 2032. That would be an increase of 67%. When looking at the
worldwide economy (measured by GDP growth) will grow at an average annual rate
of 3,2% between 2013 and 2032. The worldwide airplane fleet is expected to
increase by an average rate of 3,6% yearly whereas worldwide passenger numbers
are forecasted to rise 4,1 percent annually. Total worldwide traffic by contrast is only
forecasted to rise by an average rate of 5% annually. The 2012 fleet of aircraft
operating in the Asia-Pacific region (5.090 commercial airplanes in total) is
forecasted to grow to 14.750 aircraft until 2032. (Boeing Company 2013)
This massive growth of the airline industry will create a large amount of new
jobs and benefit the regions’ economies. Without becoming more concrete, SIA
hopes that sometime the growing number of bi-lateral and regional liberal air
agreements will be merged in a worldwide single multilateral air-agreement. (Chan
2000)
5 Conclusion
This paper has shown that China, Japan, Singapore and Malaysia have
differently developed airline industries, which will, for various reasons like the
different development of airline industry growth factors will continue to develop in
different ways.
As there was no comprehensive model for analysing the development of the
airline industry existing that does not focus on certain issues only or just compares
109
the time of two or three years, the paper has developed such a model based on two
pillars to answer the three research questions. It has analysed airlines in case
studies as the first pillar of the analytic model based on comprehensive statistic
material and shown the history of certain key indicators of airline development.
Growth factors in the airline industry have been identified and then analysed as part
of the case studies.
As the last chapter regarding the future development of the airline industry in
North- and South East Asia has shown, the future for the aviation industry in both
regions generally looks very bright, especially if seen in global context. Growth will
continue and bring further development, new jobs and better travel opportunities that
will also benefit economic connections between countries in the Asia Pacific area.
110
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7 Abbreviations
ASEAN Association of Southeast Asian Nations
ASM Available Seat Mile
CAAC Civil Aviation Administration of China
CASM Cost per Available Seat Mile
DESA United Nations Department of Economic and Social Affairs
FSC Full Service Carrier
FSA Full Service Airline
FY Financial Year
GDP Gross Domestic Product
IATA International Air Transport Association
ICAO International Air Transport Association
KLIA Kuala Lumpur International Airport
LCC Low Cost Carrier
LF Load Factor
OECD Organisation for Economic Co-operation and Development
PPP Purchasing Power Parity
RPM Revenue Passenger Mile
SIA Singapore Airlines
UNWTO United Nations World Tourism Organization
US United States
USD United States Dollar
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8 List of Tables and Figures
Table 1: Development of passenger and cargo numbers at today's ten largest airports in
the P.R.C. between 2000 and 2013 .................................................................................... 45
Table 2: Development of passenger and cargo numbers at all airports in the P.R.C.
between 2000 and 2013 ...................................................................................................... 46
Table 3: Statistical Data for Air China, 1993-2011 .............................................................. 48
Table 4: Statistical Data for China Southern, 1993-2011.................................................... 51
Table 5: Statistical Data for China Eastern, 1993-2011 ...................................................... 54
Table 6: Aircraft in operation and aircraft orders for Chinese airlines ................................ 58
Table 7: Passenger and Cargo development of Japan's 10 biggest airports between 2003
and 2010 .............................................................................................................................. 62
Table 8: Total Passenger and Cargo development of Japan's airports between 2003 and
2010 ..................................................................................................................................... 63
Table 9: Statistical data for Japan Airlines, 1993-2012....................................................... 64
Table 10: Statistical data for All Nippon Airways, 1993-2012 ............................................. 69
Table 11: Aircraft orders and deliveries for Japanese airlines ............................................ 73
Table 12: Statistical data for Singapore Airlines, 1993-2012 .............................................. 83
Table 13: Aircraft orders and deliveries for Singapore Airlines........................................... 87
Table 14: Development of passenger and cargo numbers for Singapore airport 1997-2012
.............................................................................................................................................. 87
Table 15: Statistical data for the Air Asia Group, mid 2004 - 2012 ..................................... 93
Table 16: Statistical data for Malaysia Airlines, 1994-2012 ................................................ 95
Table 17: Passenger numbers for Malaysia's 10 biggest airports between 1996 and 2013
............................................................................................................................................ 100
Table 18: Passenger and cargo statistics for all Malaysian airports 1996-2013 .............. 100
Table 19: Aircraft orders and deliveries for Airlines in Malaysia ....................................... 101
Table 20: Development of Airline Industry Growth Factors for China, Japan, Singapore and
Malaysia ............................................................................................................................. 102
Figure 1: Evolution of the relationship between share of urban population and GDP per
capita by region between 1980 and 2011 (Source: OECD, Airbus) ................................... 26
119
9 Appendix 1: World Bank data
120
121
10 Appendix 2: Abstract
The master thesis “Past and Future Development of the Airline Industry in South-
and North East Asia” shows and analyses the airline industry in the two regional
areas in regard to their development during the past two decades as well as it gives
an outlook into the future development of the industry. The thesis aims answering
three main questions: Which of the four countries of South- and North East Asia that
are in focus of this thesis sport the most pronounced growth in the aviation sector
within the last decades and what are the reasons for this growth? Why is penetration
of South- and North East Asian countries by Low-Cost Carriers still very uneven and
why has the Low-Cost aviation sector in North- and South-East Asia started
developing much later than that in Europe and the U.S.? Which airlines were best
able to cope with and profit from the changes in the North- and South-East Asian
aviation sector, and what were the key reasons for their success? As there is no
comprehensive model for analysing the development of the airline industry existing
that does not focus on certain issues only or just compares the time of two or three
years, the paper is developing such a model based on two pillars. After giving an
introduction to the topic the airline industry is divided into sub-categories such as
airlines, airports and aircraft manufacturer that will be analysed in case studies as
the first pillar of the analytic model. Therefore statistic material of various airlines has
been compiled and certain key indicators of airline development are analysed and
compared as well as its financial and operational performance. The development of
airports in the regions that are in focus of the case studies (People’s Republic of
China, Japan, Singapore and Malaysia) is also be shown and analysed in terms of
passenger numbers development. The second pillar on which the theoretical model
is built are growth factors in the airline industry and how they influenced the
development of the airline industry. Various factors are defined and then analysed
as part of every case study whether their development benefitted to the development
of the airline industry positively. Findings will be summarized and compared,
especially by comparing the performance of airlines with each other and setting their
performance into a world-wide context. The research questions are answered before
concluding the main findings of the thesis.
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11 Appendix 3: Kurzzusammenfassung
Die Masterarbeit “Vergangene und Zukünftige Entwicklung der Luftverkehrsbranche
in Süd- und Nord Ostasien“ präsentiert und analysiert die Entwicklung der
Luftverkehrsindustrie in den beiden geografischen Gebieten in Bezug auf deren
Entwicklung während der vergangenen 20 Jahre und gibt außerdem einen Ausblick
auf die zukünftigen Entwicklungen der zivilen Luftfahrtindustrie. Die Arbeit strebt
danach, drei Fragen zu beantworten: Welche der vier Länder Süd- und Nord
Ostasiens die im Mittelpunkt der Arbeit stehen, zeigen das höchste Wachstum in
ihrer zivilen Luftfahrtindustrie während der letzten beiden Jahrzehnte und was sind
die Gründe für dieses Wachstum? Was sind die Gründe dafür, dass die
Marktdurchdringung durch Billigfluggesellschaften in Süd- und Nord Ost Asien nach
wie vor sehr unterschiedlich ist und warum hat sich die Billigflugindustrie in beiden
Regionen erst viel später entwickelt als in Europa und den USA? Welche
Fluggesellschaften waren am besten dazu fähig, von den Veränderungen in der
Luftfahrtindustrie Nord- und Süd Ostasiens zu profitieren? Nachdem es in der
existierenden Literatur kein umfassendes Modell für die Analyse der Entwicklung der
Luftfahrtindustrie gibt bzw. existierende Modelle nur einzelne Bereiche oder sehr
kurze Zeiträume umfassen, entwickelt die Arbeit ein solches Modell, was auf zwei
theoretischen Säulen basiert. Dazu wird die Luftfahrtindustrie, nach einer Einleitung
ins Thema, in Unterkategorien wie Fluggesellschaften, Flughäfen und
Flugzeughersteller unterteilt die als eine der Säulen des Modells analysiert werden.
Dafür wurden Statistiken der vergangen 20 Jahre erstellt, die besonders wichtige
Indikatoren als auch die operationelle und finanzielle Entwicklung der
Luftfahrtgesellschaften enthalten und analysiert und verglichen werden. Die
Entwicklung der Flughäfen der Länder, die im Fokus der Arbeit stehen (Volksrepublik
China, Japan, Singapur und Malaysia) wird ebenfalls anhand von Statistiken, wie
z.B. der Passagierzahlen dargestellt und analysiert. Die zweite Säule auf der das
theoretische Modell aufbaut ist, sind Wachstumsfaktoren in der Luftfahrtindustrie
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und wie deren Entwicklung die Entwicklung der Luftfahrtindustrie in den letzten 20
Jahren beeinflusst hat. Dafür werden verschiedene Wachstumsfaktoren definiert
und es wird im Rahmen der Fallstudien für die einzelnen Länder analysiert, ob sie
einen positiven Einfluss auf die Entwicklung der Luftverkehrsindustrie hatten.
Die Ergebnisse werden zusammengefasst und verglichen, sowohl
miteinander, als auch indem sie in einen Kontext mit der weltweiten Luftfahrtindustrie
gesetzt werden. Die gestellten Fragen werden beantwortet und eine kurze
Zusammenfassung gegeben.
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12 Appendix 4: Curriculum Vitae (English)
Christian Nau
Personal Information
Date of birth 18.11.1987 in Munich
Nationality German
Education
1998 - 2008 Secondary school in Munich, qualification: A-levels
2008 - 2011 Westcoast University of Applied Sciences in Heide,
Germany
B. A. in Business & Law
2010 Internship semester as Management Trainee at Allianz
Insurance Company in Singapore
2011 – 2014 University of Vienna, Austria
Master studies in East Asian Economy and Society
Language skills
Mother tongue German
Foreign languages English, fluent
French, advanced
Spanish, advanced
Japanese, basic
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13 Appendix 5: Curriculum Vitae (Deutsch)
Christian Nau
Persönliche Informationen
Geburtsdatum 18.11.1987 in München
Nationalität Deutsch
Bildung
1998 - 2008 Gymnasium in München, Abitur
2008 - 2011 Fachhochschule Westküste in Heide, Deutschland
B. A. in Wirtschaft & Recht
2010 Praxissemester als “Management Trainee” bei der Allianz
Versicherung in Singapur
2011 – 2014 Universität Wien, Österreich
Masterstudium Wirtschaft und Gesellschaft Ostasiens
Sprachkenntnisse
Muttersprache Deutsch
Fremdsprachen Englisch, fließend
Französisch, fortgeschritten
Spanisch, fortgeschritten
Japanisch, Grundkenntnisse